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THE ROBERT GORDON UNIVERSITY

ABERDEEN BUSINESS SCHOOL

DEPARTMENT OF LAW

Oil and Gas Industry Standard contracts – is there such a thing:


A critical analysis

2010

By

Elaine Skene

Dissertation Supervisor: Leon Moller

Submitted in partial completion of the degree of

LLM Oil and Gas Law

Word Count – 20,559


Abstract

Oil and Gas industry operations have continually adapted to the challenges

presented by price volatility, maturity, evolving regulation and changing

perceptions within society.

One of the key drivers of all companies operating within the Oil and Gas

industry has been to reduce cost and improve efficiency to increase

productivity. This resulted in the creation of a number of government lead

initiatives, including the introduction of model contracts.

The aim of this paper is to evaluate the extent to which industry standard

contracts are used within the UK oil and Gas industry, whilst comparing the

variation of there application between companies and the alternatives to these

standard models. With the ultimate aim to answer the question, Oil and Gas

industry contracts – is there such a thing?

This paper starts by reviewing the basic contracting principles, highlighting the

risks that exist within this process and identifying key contract clauses, with

the main focus on risk mitigation. The study shall then analyse model

contracts used within the UKCS Oil and gas industry with the focus being on

how these are received and implemented by various companies working within

the UK Oil and Gas industry. The paper will also look at companies such as

ConocoPhillips UK Limited who do not use model contract. This research will

allow conclusions to be draw as to whether model contracts are the best

solution.

i
Acknowledgements

The author would like to acknowledge and thank a selection of people who

provided guidance, involvement, assistance and support with the completion

of this research dissertation.

The author is extremely grateful for the assistance, encouragement and

overall feedback provided by the dissertation supervisor Leon Moller.

Many thanks to ConocoPhillips UK Limited, who financed the author through

the final year of the LLM course and who also have also given guidance and

support when required, and for participating in research interviews.

The author would also like to thanks all those who participated in the research

questionnaire for their time and information, it really was invaluable for this

study.

Finally, but my no means least the author would like to thank family and

friends, who have always been there and provided support during the past 3

years. This work would never have been completed without their support.

ii
Contents Page
Abstract i
Acknowledgments ii
Contents iii
List of Tables v
List of Figures v

Chapter 1 - Introduction 1

1.1 Oil and Gas Industry – History 1


1.2 Oil and Gas Industry – Present 2
1.3 Industry Bodies 3
1.4 Aims and Objectives 6

Chapter 2 – Oil and Gas Contract Law 9

2.1 Introduction 9
2.2 What is a contract 9
2.2.1 Offer and Acceptance 10
2.2.2 Intent to be legally bound 12
2.2.3 Capacity to Contract 13
2.2.4 Consideration 14
2.3 Types of Contracts Used within the
Oil and Gas Industry 16
2.3.1 Joint Operating Agreements 17
2.3.2 Production Sharing Agreements 19
2.3.3 Licensing Agreements 20
2.3.3.1General 20
2.3.3.2 Licensing within the United
Kingdom continental shelf 21
2.4 Key Oil and Gas Contract Clauses 24
2.4.1 Indemnification 25
2.4.2 Consequential Loss 30
2.4.3 Limitation of Liability 31

Chapter 3 – Oil and Gas Model Contracts 33

3.1 Introduction 33
3.2 Introduction to Model Contracts 33
3.3 Advantages and Disadvantages of
using model contracts 35

3.4 Model contracts within UK Oil and Gas industry 38


3.4.1 Cost Reduction for a New Era 38
3.4.2 Leading Oil and Gas Industry Competitiveness 40
3.4.3 Industry Mutual Hold Harmless 43
3.4.4 Additional Model contracts within UKCS 46
3.4.4.1 First Point Assessment Limited 46
3.4.4.2 UKCS Joint Operating Agreement 47
3.4.4.4 Master Deed 49

iii
Chapter 4 – Research Methodology 51

4.1 Introduction 51
4.2 Research Objectives 51
4.3 Primary and Secondary Research 52
4.3.1 Secondary Research 52
4.3.2 Primary Research 53
4.4 Research Sample 57
4.5 Data Analysis 58
4.6 Research Limitations 58

Chapter 5 – Case Study, Contracting Philosophy at


ConocoPhillips UK Limited 60

5.1 Background to ConocoPhillips 60


5.2 Reasons why ConocoPhillips UK Limited do not
use LOGIC 62
5.3 Standard Contracts at ConocoPhillips UK Limited 66
5.4 Future of Contracting at ConocoPhillips UK Limited 72

Chapter 6 – Questionnaire Results 74

6.1 Introduction 74
6.2 Demographic Results 74
6.3 The use of LOGIC Contracts 77
6.4 Additional Standard Government Models 82

Chapter 7 – Conclusions and Recommendations 85

7.1 Introduction 85
7.2 Conclusions 86
7.3 Recommendations 87

APPENDICES

Appendix A: LOGIC Standard Contracts 89


Appendix B: Questionnaire 90
Appendix C: Questionnaire Results 94

BIBLIOGRAPHY 96

iv
LIST OF TABLES

Table 3.3 A summary of the advantages and disadvantages


of Model contracts 35

Table 4.1 Fundamental differences between


quantitative and qualitative research strategies 54

Table 5.3 ConocoPhillips UK Limited contract Templates 66

Table 6.1 Use of Logic across industry Sectors 78

Table 6.2 Type of Contract used by industry sector 79

LIST OF FIGURES

Figure 6.1 Time involved within the UKCS oil and gas industry 75

Figure 6.2 Companies average annual turnover 76

v
Chapter 1 – Introduction

1.1 UK Oil and Gas Industry - History

Oil and gas were the most important natural resources to be discovered in the

UK during the last century.

The UK oil and gas industry benefits our lives in many ways. Its

products underpin modern society, supplying energy to power

industry and heat homes, fuel for transport to carry goods and

people all over the world and the raw materials used to produce

many everyday items. Through its extensive supply chain, it

employs hundreds of thousands of people and makes a major

contribution to the UK economy in terms of tax revenues,

technologies and exports.1

For centuries small quantities of oil have been produced in Britain During the First

World War, when the importation of oil became more difficult, the Government

first began to consider the idea of encouraging companies to drill for oil. The

Petroleum (Production) Act 1918 conferred on the Crown the right to control

exploration and production in the UK and to grant licences for that purpose. The

war ended soon after the Act was passed and, with the resumption of cheap and

readily available imports, it was not until early 1930's that interest in

exploration began growing again.

During that time, a more systematic and concentrated exploration effort was

initiated ranging from southern counties with prospects considered similar to

the Paris Basin, to the Midlands, North of England and Scottish Lowlands. The

Petroleum (Production) Act 1934, which repealed the 1918 Act, reaffirmed the

1
http://www.oilandgasuk.co.uk/knowledge_centre.cfm - last accessed 05/05/2010
1
Crown's ownership and set out the framework to allow production. The first

successes came in 1937 when an onshore gas field was found in Yorkshire, soon

followed by a small oil field near Nottingham. By the 1940's 40,000 tonnes of oil

were being produced per year.

1.2 UK Oil and Gas Industry – The Present

Today the UK Oil and Gas industry contributes significantly to the UK

economy.

In 2008, some 450,000 jobs throughout the UK were supported

by the servicing of activity on the UKCS and in the export of oil

and gas related goods and services: The exploration for and

extraction of oil and gas from the UKCS accounted for around

350,000 of these; this comprised 34,000 directly employed by oil

and gas companies and their major contractors, plus 230,000

within the wider supply chain. Another 89,000 jobs were

supported by the economic activity induced by employees’

spending.2

There have been many factors since the late 90s which have brought change

within the UK oil and gas industry. One of the most significant changes was

the steady increase on the price of oil. The price of oil and gas has increased

steadily from approximately $10 a barrel in 1999 to approximately $140 in

2008. This resulted in increased turnover and made the North Sea oil and gas

operators relatively cash rich. However, during 2009 the oil price has slumped

2
http://www.oilandgasuk.co.uk/knowledgecentre/supplychain.cfm
2
back from $140 per barrel to around the $40. 2010 has seen the price of oil

slowly rise with the average price in April being $85 per barrel. 3

Oil and Gas industry operations have continually adapted to the challenges

presented by price volatility, maturity, evolving regulation and changing

perceptions within society. To overcome and manage these changes, oil and

gas operators have created economies of scale through joint venture

agreements and spreading costs over their many assets, traditionally, this

industry has only been interested in cost saving initiatives during the hard

times4. The industry has now begun to mature with total output in decline. As

a direct result of this there has been a trend whereby the larger oil companies

are selling shares in mature assets to focus on new emerging oil and gas

markets. As a result there has been an influx of new entrant oil and gas

operators within the market. “There is now a broad array of firms that are

equipped in different ways to operate within the current economic climate” 5.

One of the key drivers of all companies operating within the Oil and Gas

industry has been to reduce cost and improve efficiency to increase

productivity. However during the period of high oil prices, cost became less

important and the focus of the operators shifted to reaping the rewards

available from producing oil and gas. However, the recent crash in the price

of oil is likely to change the nature of the environment once again and

resurrect the issue of cost reduction and efficiency to be top of the agenda for

UKCS oil and gas operators. One way in which cost reductions and efficiency

3
Figures extracted from http://www.oilnergy.com/1obrent.htm#since88 - last accessed 25/4/2010
4
Cox, A., (2008), Wild-West or Collaborative Innovation?, obtained from article presented by Andrew Cox,
Chairman, Newpoint Consulting and Visiting Professor Universities of Exeter, Nyenrode & San Diego,
presented to oil and gas UK
5
http://www.oilandgasuk.co.uk/knowledgecentre/supplychain.cfm - last accessed 05/05/2010

3
may be achieved is through government initiatives and working with the Oil

and Gas Industry bodies.

1.3 Industry bodies

The UK Government and UKCS oil and gas operators for many years have

agreed that it was essential that new ways to improve the efficiency of the oil

and gas industry were developed. This resulted in the creation of a number

of initiatives in the 1990’s to find away forward. The main initiatives are

outlined below.

1. In 1992 the Cost Reduction Initiative in the New Era (CRINE) was created.

The initiative was steered by a committee comprised of senior executives

from all sectors of the UK offshore industry and its main objective was

simply to find ways of reducing capital and operational costs on the UK

Continental Shelf (UKCS). In 1996 when it became clear that the whole

industry supply chain must be engaged in finding new and innovative

ways of reducing costs and working more efficiently, CRINE evolved into

'CRINE Network' - a body comprising representatives of all sides of

industry including operators, contractors and suppliers of equipment.

This marked the beginning of the creation and formulation of a series of

new bodies and initiatives designed to reduce costs and promote the

efficiency of the North Sea as an environment for doing business6.

2. In 1998 the Oil & Gas Industry Task Force (OGITF) was formed in

recognition of the dramatic fall in oil prices, the maturing of the UKCS,

and the urgent need to reduce the cost base of activity in the basin. Its

overall objective was to create a climate for the UKCS to retain its

6
CRINE (1999), Executive Summary, Oil and Gas Supply Chain, CRINE Network, London.
4
position as a pre-eminent active centre of oil & gas exploration,

development and production and to keep the UK contracting and

supplies industry at the leading edge in terms of overall

competitiveness7.

3. PILOT was established on 1st January 2000, as the successor to OGIFT.

Pilot is a joint programme involving the Government and the UK Oil and

Gas industry – operators, contractors, suppliers, Trade Unions and

SME’s – aiming to secure the long term future of the industry in the

UK.8

4. LOGIC (Leading Oil and Gas Industry Competitiveness) was created in

1999 by the Government's Oil and Gas Industry Task Force (OGIFT) to

improve competitiveness in the UKCS by targeting efficiencies in the

supply chain9.LOGIC was the vehicle used to educate the Oil and Gas

industry on Supply Chain Management. Its other function was to

manage a number of cross-industry projects such as vantage POB, the

Master Deed, Industry Mutual Hold Harmless Deeds and Industry

standard contracts10.

5. Oil & Gas UK (OGUK) is the leading representative body for the UK

offshore oil and gas industry. It is a not-for-profit organisation,

established in April 2007 but with a pedigree stretching back over 30

years. OGUK’s main aim is to strengthen the long-term health of the

offshore oil and gas industry in the United Kingdom by working closely

7
http://www.pilottaskforce.co.uk/data/phistory.cfm - last accessed 09/05/2010
8
http://www.pilottaskforce.co.uk/data/aboutpilot.cfm- last accessed 09/05/2010
9
http://www.logic-oil.com/about.cfm- last accessed 09/05/2010
10
Ibid
5
with companies across the sector, governments and all other

stakeholders to address the issues that affect business. OGUK achieve

this by -

 raising the profile of the UK offshore oil and gas industry, one of the

country’s greatest economic successes in modern times

 promoting open dialogue within and across all sectors of the industry

on topics that influence your activities, including technical, fiscal,

safety, environmental and skills issues, and brokering solutions

 developing and delivering industry-wide initiatives and programmes

engaging with governments and other external organisations with a

stake in the industry’s future11

1.4 Aims and objectives

This paper aims to evaluate the extent to which industry standard contracts

are used within the UK oil and Gas industry, whilst comparing the variation of

there application between companies and the alternatives to these standard

models.

This aim will be achieved by undertaking a review of literature already

completed on this subject and will be supported with practical examples to

provide evidence of its impact.

The key focus of this paper shall be on the following –

 to critically analyse the use of Standard LOGIC contracts within the UK

Oil and Gas industry;


11
http://www.oilandgasuk.co.uk/aboutus/aboutus.cfm - last accessed 09/05/2010
6
 to evaluate whether there is a trend as to what types of companies use

LOGIC and the reasons for doing so;

 an evaluation of those companies who choose not to use LOGIC and the

reasons for this.

 to identify and discuss alternative contracting methods used by various

companies, in particular ConocoPhillips, who use a variety of bespoke

contracts,

In order to meet the above defined aims the following stages will be

necessary:

1. An introduction to Oil and Gas contract law. This will outline the basic

principles of contract formation. It will also identify and discuss many

key contract clauses explaining there importance within the Oil and Gas

industry. Consideration will also be given to the different types of

contracts used within the Oil and Gas industry and how this can vary.

2. A critical analysis and review of Standard Oil and Gas industry

contracts. Firstly the concept of model contracts will be introduced with

a discussion on the advantages and disadvantages of using such

models. The focus will then move to the formation of CRINE/LOGIC,

who created the contracts and why. And shall include discussion on

additional government initiatives that are currently in use within the

UKCS Oil and Gas Industry.

3. Empirical Research. This will identify the research methods used to

gather the relevant information. In particular it shall focus on the

development of a questionnaire used to provide an understanding of the

7
use of LOGIC within the Oil and Gas Industry and how this differences

between companies.

4. A case study – the contracting strategy of ConocoPhillips UK limited.

This will give a brief overview of who ConocoPhillips are and what they

do. It will examine why ConocoPhillips do not use standard Oil and Gas

industry contracts. It will then examine what bespoke contracts

ConocoPhillips use instead of LOGIC and there reasons behind this.

5. Questionnaire Results. The information obtained will be collated and

critically assessed to see how many companies actually use LOGIC. It

will also be used to identify and similarities in responses with regards to

the number and types of qualifications that companies use and will be

compared to the perceived advantages and disadvantaged identified

during Literature review.

6. Conclusion. Conclusion on findings and any recommendations that have

been identified through the research.

Now that the background and aims of this study have been outlined, it is

prudent to focus on contracting within the UK. Chapter two shall begin with

an introduction to contracting in general; it will look at the variety of contracts

used within the UKCS Oil and Gas Industry. Thereafter there will be

discussion on key contractual clauses and there importance within the UKCS

Oil and Gas industry.

8
Chapter 2 – Oil and Gas Contract Law

2.1 Introduction

This chapter is concerned with identifying and examining the concept of

contracting, both generally and in relation to the Oil and Gas Industry.

Thereafter is necessary to discuss particular contract clauses, with the focus

here being on risk management and its importance within the UKCS oil and

Gas industry. This will be accomplished by considering the basic principles of

contracting with reference to legislation and case law, and an analysis of its

importance within the Oil and Gas industry.

2.2. What is a contract?

Before looking at specific Oil and Gas related contractual issues, it is prudent

to review the basic principles of what a contract actually is, how it is created

and what is contained within it.

A contract is an agreement between two or more parties that is binding in law.

The agreement generates rights and obligations that may be enforced by the

courts. The name given to the document used to record an agreement e.g.

Purchase Order, Agreement, Contract, etc does not affect the nature of the

agreement or the effect of the agreement.

A much quoted definition of a contract is that it is ‘ an agreement which

creates, or is intended to create, a legal obligation between the parties to it’ 12

12
Jenks, E(1917) A digest of English Civil Law, London, Butterworth and Co, Vol 2.1 – taken from Gibb, A
& Gordon (2009) A Law basics – contract, 3rd edition, W Greenp2.
9
There are three basic elements in the formation of a valid contract. First,

parties must have reached agreement (offer and acceptance); secondly, they

must intend to be legally bound; and thirdly, both parties must have provided

valuable consideration.

2.2.1 Offer and Acceptance

An offer and an acceptance are necessary in order to ensure that the parties

have reached agreement as to the terms of the contract.

An offer may be defined as a statement of willingness to contract on specified

terms made with the intention that, if accepted it shall become a binding

contract.

Acceptance may be defined as unconditional assent communicated by the

offeree to the offeror, to all terms of the offer, made with the intention of

accepting.

In general there is no need to execute a document for a valid contract to be

formed so a contract may be created as a result of verbal, e-mails or

telephone conversations; however it is best practice to enter into agreements

in writing.

There are a number of situations where it is obvious that offer and acceptance

have been exchanged: execution of a written agreement, conduct of the

parties indicating that a binding contract exists.

10
Furmston13 comments that a court will examine all the circumstances of the

case to see if one party is assumed to have made a firm offer and if the other

party has accepted that offer. However it is not always obvious that offer and

acceptance has been made. Situations where not so obvious include: counter-

offers, battle of the forms, incorporation of terms to name a few. In such a

situation Lord Denning14 took the view that the circumstances as a whole

should be examined in an attempt to discover if there was an agreement at

all.

Poole15 argues that it has been proven that courts will certainly hold that there

is a contract in place even if it is challenging or impossible to analyse the

events in terms of offer and acceptance. This was view was reinforced by Lord

Wilberforce16 when he stated,

….English law, having committed itself to a rather technical and

schematic doctrine of contract, in application takes a practical

approach, often at the cost of forcing the facts to fit uneasily

into the marked slots of offer, acceptance and consideration.

Therefore it is clear that the courts when reaching conclusion will consider the

words and actions of the parties during the negotiations. Broadly speaking

there are two stages that are crucial to form a contract – an offer must be

made by one party, and acceptance must be given by the other.

In deciding whether an agreement has been reached by the parties, the courts

tend to take an objective approach. The test is whether or not it would appear

13 th
Furmston, M (2007), fitfoot & furmstons’s law of contract, 14 Edition, Butterworths, Cheshire,p39
14
Butler Machine Tool Co.Ltd v Ex-Cell-O Corporation (England) Ltd (1979) 1 WLR 401
15
Poole, J (2006), Contract Law, 8th Edition, Oxford university press. London, p21.
16
New Zealand Shipping Co Ltd v M. Satterthwaite & Co Ltd, The Eurymendon [1975] AC 154 (PC)
11
to a “reasonable man” that an agreement had indeed been reached. As stated

by Lord President Dunedin17,

Commercial contracts cannot be arranged by what people think

in there inner most minds. Commercial contracts are arranged

by what people say.

However, Elliot and Quinn18 state that acceptance may be inferred by the

actions and behaviours of the parties as in Brogen v Metropolitain Rail Co.19

Depending on the volume of communications between the parties silence may

be an acceptance of the offer if the offeree suggested that there silence would

be sufficient as in the case of Re Selectmove Ltd20.

Now the key issues of offer and acceptance have been considered, the other

essential elements required to form a contract will be examined.

2.2.2 Intent to be legally bound

For a contract to be binding it is necessary to show that there was an intention

to create legal relations. Not all agreements create a contractual obligation.

Huntley, Blackie and Cathcart21 state that the difficulty lies in establishing

logical and fair rules for differentiating those which do from those which do

not. Some agreements are so serious in their consequences that the law

generally requires that they be in the appropriate form if they are to be legally

binding. Another technique is to establish a presumption that parties to

17
Muirhead & Turnbull v Dickson (1905) 7 F686
18
Elliot, C & Quinn, F. (2003) Contract Law, 14th edition, Longman Press, p19
19
(1877) 2 App Cas 666
20
(1995) 1 WLR 474
21
Huntley. J, Blackie.J & Cathcart. C (2003) Contract – cases and materials 2nd edition, W green, p14
12
certain types of agreements intend to enter into legally biding relations. The

corollary would be that other categories of agreement are presumed not to be

legally binding. This is backed by Bradgate and Savage22 who state that the

intent of a party is dependent on the type of contract. Contracts that have no

intention usually involve domestic or social agreements such as Balfour v

Balfour23.

There is a presumption in law, relating to commercial transactions, that parties

intended their agreements to have legal consequences. Elliot and Quinn

support this,

There is a strong presumption in commercial agreements that the

parties intend to be legally bound, and, unless, there is very clear

contrary evidence, this presumption will not be rebutted.24

2.2.3 Capacity to Contract

In addition, to the intent to be legally bound, the parties must have the legal

capacity to contract. The law requires that persons entering into a contract

have the necessary capacity.

As a general rule, a contract with a person suffering from mental disability or

drunkenness is valid, unless the person is, at the time of contract, incapable of

understanding the nature of the transaction and the other party is aware of

this. In addition minors, I.e. persons under the age of 18, are subject to

provisions on the Minors’ Contract Act 1987. However in consideration of this

paper only corporate capacity is relevant.

22
Bradgate, R & Savage, N. (1991) Commercial Law p24
23
(1919) 2KB 571 (CA)
24
Elliot, C & Quinn, F. op cit p20
13
Furmston confirms that it is essential that a contracting party is a person

recognised by law as having capacity to contract, however persons in law are

not limited to individuals;

Two or more persons form themselves into an association for the

purpose of some concerted enterprise…a trading company; the

association is in some cases regarded by the law as an

independent person25.

Companies are classified according to the manner in which they are created,

they are either registered, statutory and chartered. The main focus of this

paper is registered companies. A registered company is one which is

registered under the Companies Act 1985. These companies have capacity to

enter into contracts that are within the limits of the objects clause of the

company’s memorandum of association. This is a public document without

which a company cannot be registered. Any contract entered into that is

outside the activities detailed in the memorandum is said to be ultra vires, and

therefore invalid. Elliot and Quinn26 explain that the purpose of this limit in

capacity is to protect the shareholders and creditors against directors who use

company resources for there own unauthorised purposes.

2.2.4 Consideration

In addition to offer and acceptance and contractual intent, consideration is an

essential element in the formation of any contract. Consideration is not a

requirement under Scots law which recognises “unilateral obligations” or

“promises”. However most contracts within the UK oil and gas industry are

governed by English law, therefore consideration is essential.

25
Furmston, M op.cit. p564
26
Elliot, C & Quinn, F op.cit. p60
14
Consideration is the requirement of reciprocal obligations on the parties to a

contract. Both parties must receive valuable consideration for there

performance of their side of the contract. In other words each party must give

something in return for what it gained from the other. Poole27 argues that this

is because English law assumes that only bargains should be enforced. A

promise not supported by consideration is referred to as a gratuitous promise

and is generally not enforced by law.

In business contracts there is rarely an issue with consideration as

businessmen rarely promise something for nothing. Business contracts are

usually bilateral whereby the price requested by the promisor is accepted in

exchange for the promissors which is bought as defined by Lord Deundin 28.

However Bradgate and Savage29 argue that the consideration is important in

commercial contracts in a number of situations, such as an awareness that

consideration cannot be in the past, it must be in return for the promise or act

of another party at the same time or after.

If all of the above requirements are complied with the parties should have a

binding contract. As a general rule all Oil and Gas contracts must meet all the

requirements for binding legal agreement, this is confirmed by Lowe 30

A promise becomes a contract, a legally binding agreement, only

if there have been an offer and an acceptance of clear and

unambiguous terms…..supported by consideration, between two

persons or entities with legal capacity to contract.

27
Poole, J (2006) op.cit, p185.
28
Dunlop Pneumatic Tyre Co.Ltd v Selfridge & Co Ltd (1915) AC 847
29
Bradgate, R & Savage, N. (1991) Commercial Law, Butterworths , London p18
30
Lowe, J.S ( 2003) Oil and Gas Law , 4th Edition, Thomson press, p383
15
Although the foregoing discussion concentrates on contract formation at a

general level, the same principle must be applied to contract places within the

UK Oil and Gas industry. This is because the contracts placed within the Oil

and Gas industry will be subject to the same legal proceeding should there we

an issue, for example breach of contract, or a claim against the contract under

indemnity or warranty provisions.

Now that the basic principles of contract formation, under English law, have

been established it is necessary to consider some of the major legal and

contractual issues associated with contract drafting, focusing in particular on

risk mitigation. These contracting issues will then be examined in relation to

the Oil and Gas industry.

2.3 Types of Contracts used within Oil and Gas Industry

Oil and Gas companies enter into a variety of different contracts, some of

these agreements are forced upon them by the Law and others are to aid

operations, reduce costs or share risks with other like oil and Gas companies.

Oil and Gas companies commonly enter into agreements with other oil and gas

companies to pull resources via Joint venture agreements or for the provision

of goods and services. They also enter into contracts directly with the

government in the form of Production Sharing Agreements or Licensing

agreements, this is because the government hold the right for exploitation of

petroleum. Some of these agreements are discussed in greater detail below.

16
2.3.1 Joint Operating Agreements

Joint Operating Agreements (JOA’s) are one of the most important and

commonly used types of contract in the oil and gas industry. Originally

developed in the USA, they are today used by oil companies all over the world.

A JOA is entered into to regulate the interests of the parties who come

together in a joint venture. These parties pool their resources for the purpose

of exploring or exploiting a certain area of licensed acreage, and share in the

associated risks and rewards. Styles31 believes there are several benefits of

entering into a JOA,

Joint ventures allow oil companies to mitigate their risks and

share in the outlays required for capital-intensive exploration,

development and production activities. Joint ventures also

facilitate cost savings and economies of scale which enable the

participating companies to operate with fewer employees, permit

the elimination of duplicate facilities, equipment and functions

and allow cost savings through bulk purchases of supplies and

materials. The joint venture is also important in that it allows

upstream oil and gas companies to manage their portfolio of

assets in a manner that seeks a balance between minimising risk

and maximising returns.

In essence the JOA has two principal functions, one is to document the

proportions in which the parties will share the rights and obligations of the

venture. The most common division is in accordance with the interests of the

participants. The other is to specify the way in which the operator will

31
Gordon, G & Paterson, J(2007) Oil and Gas law- Current practices and emerging trends, Dundee
university press, p265
17
manage, subject to the direction of an operating committee, in the event that

such a committee has been constituted.32

Prior to entering into the JOA the parties will have enter into a Joint Bidding

Agreement (JBA) at the stage of making their joint application for licence

acreage. In addition to conditions of applying for a licence, this agreement will

also include key points to be incorporated into the JOA if the application is

successful.

The JOA will detail each party's percentage interest, entitlement to benefits

and liabilities. The standard approach is to share benefits and liabilities in

relation to the parties' percentage interests. Liability will usually be several,

not joint, and will be backed by indemnities. The indemnities will usually

contain the provision whereby the parties agree to indemnify and hold each

other harmless for any claims and liabilities, to the extent of their percentage

interests under the JOA. Indemnities and limitation of liability are discussed in

greater detail in 2.3, of this chapter.

The parties to the JOA will appoint an Operator to run the joint venture. The

Operator will, in most cases, be a party to the licence and have a substantial

interest in the venture. The Operator's role will include: organising meetings;

proposing and implementing programmes, budgets, and Authorisations for

Expenditure; providing co-venturers with data; liaising with government;

acting as agent with third parties on behalf of the venture and the day to day

operations. The Operator will be supervised by an operating committee made

up of representatives of each of the parties to the JOA.

32
Smith, E. E, et al.(2000) International Petroleum Transactions, 2nd edition, Denver, Colorado: Rocky
Mountain Mineral law Foundation, p164.
18
As discussed at the start of this chapter, Oil and Gas companies often enter

into contract directly with the government for the rights of petroleum

exploration. A Production Sharing Agreement is an example of this.

2.3.2 Production Sharing Agreements

Production sharing Agreements are the main type of contracts used for the

development of petroleum reserves in jurisdictions where the government do

not grant licences over areas to exploit petroleum, as is the case in the UK,

but instead the government, or often the state oil company on behalf of the

government enters into a PSA in co-operation with a contractor, whereby the

contractor develops the reserves and supplies all of the resources required to

do that for a share of the petroleum reserves. The contractor is rewarded with

a share of production.

A production sharing agreement is a contractual arrangement

made between a foreign oil company (contractor) and a

designated state enterprise (state party), authorising the

contractor to conduct petroleum exploration and exploration

within a certain area (contract area) in accordance with the rules

of the agreement.33

Licensing Agreements are also another example of contracts between Oil and

Gas companies and the Government.

33
Taverne, Bernard, edited by David, Martin R,(1996) Upstream Oil and Gas Agreements, Sweet &
Maxwell, p44.
19
2.3.3 Licensing Agreements

2.3.3.1General

A licence is essentially a permission granted by a state to an Oil company to

exploit a certain geographical area in return for a fee or a royalty.

In the early years each arrangement was negotiated separately with each

individual company. Over recent years countries have implemented model

contracts and petroleum codes to help standardise the process,

The leases and concessions developed in the early years of

petroleum development, which provided extraordinarily

advantageous to the companies receiving rights to develop

the petroleum have in almost every instance been terminated

or modified.34

The processes by which these changes have occurred vary; in the US the

courts and administrative agencies have played a huge role in changing the

original agreements. Sovereign states have not had the option to turn to the

courts or administrative agencies and as a result have turned to

nationalisation to regain control over natural resources, this was the approach

taken by Mexico. Where as the Middle East nations managed to talk the oil

companies into renegotiation the original concessions.

34
Hamilton, (1973)Concession to Participation: Restructuring the Middle East Oil Industry, 48 N.Y.U.L Rev
744, p 776-77
20
2.3.3.2 Licensing within United Kingdom Continental Shelf

In order to explore for oil and gas it is necessary to have access to lands or

subsea areas which are not usually owned by the companies’ conduction the

exploration. All oil companies must ensure it has all necessary and relevant

permits and authorities to enable it to do so. This will involve the co-operation

of the host government and compliance by the company with whatever

consents are necessary.

Procedurally these consents in most jurisdictions came in two

forms: either the grant of a concession in the form of a licence

or a lease, or alternatively by the conclusion of a production

sharing agreement.35

The UK's onshore petroleum licensing regime was set up under the impetus of

the fuel demands of the First World War. The Petroleum (Production)

Act36vests all rights to the nation's petroleum resources in the Crown, however

the Secretary of State can grant licences that confer exclusive rights to

"search and bore for and get" petroleum.

As with any licensing system, many of the detailed regulatory provisions are

laid down in conditions attached to the licences known as Model Clauses. It is

the Licensee's responsibility to understand these conditions and ensure they

are observed.

Licences can be held by a single company or by several

working together, but in legal terms there is only ever a single

Licensee, however many companies it may include. All the

companies on a Licence share joint and several liability for

35
Jennings, Anthony,(2001) Oil and Gas Exploration Contracts, Sweet & Maxwell, p1.
36
The Petroleum (Production) Act 1934, This Act has since been consolidated along with other petroleum
related legislation, in the Petroleum Act 1998
21
operations conducted under it. Each Licence actually takes the

form of a Deed, which binds the Licensee to obey the licence

conditions regardless of whether or not s/he is using the

Licence at any given moment.37

There are five different types of licence available under the UK licensing

regime –

1) Production Licences (Seaward)

2) Exploration Licences (Seaward)

3) Promote licences

4) Onshore petroleum Exploration and Development Licences

5) Supplementary Seismic Survey Licences.

The first three licenses relate to offshore exploration and production.

The main type of offshore Licence is the Seaward Production Licence, which

confers exclusive rights over defined areas. They do not only cover production

- they cover the full life of a field from exploration to decommissioning. For

licensing purposes the UKCS is divided into quadrants, each quadrant is

further divided into thirty blocks.

As there are companies which only carry out exploration activity over wide

areas of the offshore sector and do not require exclusive rights to do this,

petroleum exploration licences are available. This type of licence was made

available, as it would be impractical and prohibitively expensive to require a

production licence in respect of pure exploration activities. Exploration

licences are non-exclusive and will run for three years and permit the holder to

conduct non-intrusive surveys.

37
https://www.og.berr.gov.uk/upstream/licensing/overview.htm - last accessed 02/05/2010
22
The promote licence is a relatively new licence which has been created by the

Department of Trade and Industry (DTI known as BERR) in pursuance of the

objective of catalysing offshore activity in the UK. Under the promote licence

the licensee would work up potential prospects without being required to

undertake substantial seismic drilling activity. Under this new license,

licensees have a legal interest in the commercial value created by their work

but, in order to retain their licences, are obliged to undertake or secure drilling

activity after the expiry of the initial appraisal period.

The Promote Licence demonstrates the governments approach

to incentivising new entrants to the UKCS while desensitising

operators who do not make active use of their licence.38

Within the UK system there are three ways of acquiring licence interests, by

invited applications via licensing rounds, Out-of-round applications and

Assignment of licence interests.

Most petroleum Production licences may only be applied for in licensing rounds

opened by a notice by the secretary of state inviting applications in respect of

specified blocks. The notice will set out the information required for each

application as well as the criteria upon which applications are assessed. Most

applications are made by consortia of two or more companies.

Most Petroleum Production licences are awarded in licensing rounds, however

an out of round application maybe considered where a compelling case is

presented such as clear grounds of urgency, or where it is considered there is

no prospect of competition anyway.

38
Gyaltsen, S and Turton, A,(2003) International Energy Law & Taxation Review , The Master Deed and
changes in the North Sea, p258.
23
Interested parties can also acquire a licence interest by purchasing it from

current licence-holders. The transfer of any licence interest requires the

consent of the Secretary of State and there are statutory regulations set out

factors which should be taken into account. The main concern is whether the

assignee is a fit and proper person to be a licensee in terms of technical and

financial capabilities.

Each licence carries an annual charge, called a rental. Rentals fall due each

year on the licence anniversary39 they are charged at an escalating rate on

each square kilometre that the Licence covers at that date. Rentals have two

purposes: they encourage Licensees to surrender acreage they don't want to

exploit, so as to free it up for others who do; and they concentrate their minds

on the acreage they actually decide to keep.

These examples show the diversity of contracts that Oil and Gas companies

enter into. The accelerated pace of change in the Oil and Gas industry makes

it one of the worlds most challenging and complex industries in which to

understand, draft and negotiate contract.40Therefore the next section of this

paper shall review the key contract clauses that should be given careful

consideration.

2.4 Key Oil and Gas Contract Clause

In all oil and gas contracts there are a number of common issues with regards

to content, regardless of what the contract is for. The main areas in which all

contracts are similar is how risk to the parties it mitigated.

39
Except that for pre-20th Round Seaward Production Licences in their Initial Terms, rentals only fell due in
Year 1.
40
http://www.emagister.co.uk/shared/uploads_courses/files_projects_2/106_oil_dubai_web.PDF - last
accessed 09/05/ 2010.
24
The oil and gas industry is an inherently hazardous one. Exploring for,

producing, transporting and processing volatile hydrocarbons is attended by a

whole host of risks: to people, property, the environment, and to the valuable

commodity itself. The oil and gas industry has developed a number of

contracting practices to allow it to regulate and manage these physical risks.

Generally speaking oil and gas contracts seek to depart quite radically from

the common law’s presumptions about how risk should be allocated.

Three vehicles are commonly used to achieve this: (a) indemnity

clauses; (b) clauses that exclude liability for what are commonly, if

rather loosely, described as “consequential losses”; and (c) overall

limitation on liability.41

Each of these key issues will be examined in turn.

2.4.1 Indemnification

When an indemnity is included in a contract it is an undertaking by one party to

reimburse the other party for certain costs, expenses, outlays or damages. This is

a contractual obligation and must therefore be distinguished from any claim,

which may arise in delict or tort. However, to ensure that a contact captures in an

indemnity all possible claims, then it is common to see wording that includes

claims in tort or delict in indemnity clauses.

Indemnities have long been used to control risk in contracts, not just those related

to the oil and gas industry, and have been traditionally treated by the law with

considerable suspicion. It is generally true that the sums due under an

indemnity are more limited than those, which would be potentially due under

41
Gordon, G & Paterson, J op.cit, P 335
25
the normal rules of damages arising from breach of contract or from

delictual/tort claims.

An indemnity is a contractual provision whereby the indemnifying

party agrees to make payment to the party having the benefit of the

indemnity in the event that the indemnified party suffers loss as a

result of the occurrence of a specific event.42

This type of indemnity clause is often referred to as a simple indemnification. Oil

and gas contracts often contain a number of simple indemnification clauses, as

described by Gordon, above. However within oil and gas contracts, it is common

that additional wording is added to simple indemnification clause to state that the

parties will also defend claims taken against the indemnified party.43

Although simple indemnifications are used, the most common type of indemnity

used is a mutual indemnity, often referred to as a ‘knock-for-knock’ indemnity,

this type of indemnity is;

A contractual device where the parties with one hand give and with

the other hand take an indemnity in respect of species of loss which,

if the indemnity is to avoid circularity must not be identical to each

other, but which are usually closely related.44

In other words mutual indemnities provide that each party shall be responsible

for and shall save, indemnify, defend and hold harmless the other from and

42
Gordon, G & Paterson, J op.cit,, P 336
43
This was discussed by Lord President Rodger in the inner house phase of Caledonia North Sea Limited v
London Bridge Engineering Ltd 2000 SLT 1123 at 1155.
44
Gordon, G & Paterson, J op.cit,, P 337
26
against all claims, losses, damages, costs (including legal costs), expenses and

liabilities in respect of:

a) Loss of, damage to or destruction of any property of the other party and

its subcontractors;

b) Personal injury or death of any third party arising from, relating to or in

connecting with performance of the contract

c) any personal injury to or death of any employee, agents or invitees of

the parties or its subcontractors however arising whether or not due to

negligence (either in whole or in part) of the other party.45

Gordon states that the underlying legal principle of the mutual indemnity

regime is that the parties are allocating (more properly, re-allocating) between

themselves the risk of the occurrence of a particular type of loss.46 The idea is

that an indemnity clause places the risk with the party who is best placed to

deal with it, effectively making each party responsible for there own loss.

Prima facia, the mutual indemnity sounds illogical. However there are a

number of sound reasons for this commercial approach.

It means that each party insures against injury or damage to its

own people and property, the value of which it knows best.

Smaller contractors who could not afford the risks of working

offshore if they might be held responsible for accidents to

expensive platforms and equipment are able to compete for the

business of operators. It means contractors do not have to have

the levels of insurance that they would otherwise need, and

45
Adapted from Logic – Construction contract – accessed at http://www.logic-oil.com/construct2.pdf,
46
Gordon, G & Paterson, J op.cit,, P 341
27
therefore keeps costs down. It also reduces litigation by creating

a clear system of risk allocation that reduces costs for the

industry.47

It is important that when drafting an indemnity clause to establish the

contracting groups to the clause are correct, these are usually referred to as

Company Group and Contractor Group and take into consideration a number

of different groups of individuals. LOGIC standard contracts48, discussed in

greater detail in chapter 3, define these as:

"COMPANY GROUP" shall mean the COMPANY, its CO-

VENTURERS, its and their respective AFFILIATES and its and their

respective directors, officers and employees (including agency

personnel), but shall not include any member of the

CONTRACTOR GROUP.

"CONTRACTOR GROUP" shall mean the CONTRACTOR, its

SUBCONTRACTORS, its and their AFFILIATES, its and their

respective directors, officers and employees (including agency

personnel), but shall not include any member of the COMPANY

GROUP. “CONTRACTOR GROUP” shall also mean subcontractors

(of any tier) of a SUBCONTRACTOR which are performing WORK

offshore or at any fabrication yard or construction site, their

AFFILIATES, their directors, officers and employees (including

agency personnel).49

47
Warne, P , Contract indemnity clauses – keep a watchful eye on the case law, The press & Journal,
Published: 01/02/2010, accessed at
http://energy.pressandjournal.co.uk/Article.aspx/1572810#ixzz0mgROoXoI
48
Further discussion of LOGIC standard contracts can be found in chapter 3
49
http://www.logic-oil.com/marine2.pdf - last accessed 05/05/2010.

28
Although these definitions are broad, there may however be many different

contractors working on an installation at anyone time, with very few of these

having a direct contractual relationship. This regrettably allows in contractual

gaps to appear within the indemnity chain outlined above. Therefore on July

1, 2002 the Industry Mutual Hold Harmless (IMHH) Scheme went live. The

primary objective of the Scheme was to address the contractual gap, which

has traditionally existed between contractors working on the UK Continental

Shelf.

The IMHH Scheme has evolved from popular demand in the

industry for clarity in allocation of liabilities and consequent

avoidance of overlapping insurance of identical risks.50

Sharp51 comments it is not intended that the IMHH Deed that participants sign

takes precedence over existing or future contractual arrangements; its

purpose is to address liability for property damage or personal injury where

there is no contractual arrangement in force between the respective parties.

Further discussion of IMHH can be found in Chapter 3.

So far the practical application of indemnity clauses has been discussed, the

focus now shall be on the position of such clauses at law. Gordon52 comments

that the UK has no specific statutory controls in place for the use of indemnity

clauses in oil and gas contracts. This can be contrasted with the United

Stated of American oil industry whereby state legislature has passed oilfield

anti-indemnity statutes in a number of states.

In the UK indemnity regimes are not considered to be unfair, this is evident by

virtue of the Unfair Contract Terms Act 1977 and case law. In Thompson v T

50
http://www.imhh.com/about.cfm - last accessed 01/05/2010
51
Sharp, D, (2007), Standard bulletin : Special edition – offshore, p.6 accessed at http://www.standard-
offshore.com/docs/SB_Oct07_disclaimer.pdf on 01/05/2010.
52
Gordon, G & Paterson, J op.cit, P 352
29
Lohan plant hire53, the courts decided that indemnity clauses are not

considered to be exclusion or limitation clauses as they transfer, rather than

limit liabilities.

As the indemnity regime applied within the oil and Gas industry does not

follow the traditional rules of contract law and torte, it is essential that

indemnity clauses are well drafted, that they do not lack clarity in regard to

whom the risk is allocated and under what circumstances. An incorrectly or

poorly drafted indemnity clause may be subject to traditional law and not

industry expectation. However Warner54 states that litigation on indemnity

clauses is not common.

2.4.2 – Consequential loss

Following on from indemnity clause, another important clause for

consideration in oil and gas contracts is Consequential loss. This can be

defined as loss suffered as an indirect result of breach of contract, the test for

consequential loss was described in Hadley v Baxendale55.

Within the Oil and Gas industry parties are keen to exclude this clause as it

place can place excessive losses upon them. Gordon agrees with this concept

but states that it is not always easy to ascertain which limb of the Hedley test

a particular loss will fall into. Therefore as explained during the discussion of

indemnity clauses it is essential that consequential loss clauses are carefully

drafted. Gordon56 states that here has been some disagreement on what the

best practise is when considering with consequential loss – should the

definition of consequential loss contain a closed list or should there be a

53
1987 2 All ER 631
54
Warne, P , Contract indemnity clauses – keep a watchful eye on the case law, The press & Journal,
Published: 01/02/2010, accessed at
http://energy.pressandjournal.co.uk/Article.aspx/1572810#ixzz0mgROoXoI
55
(1854) 9 Ex 341.
56
Gordon, G & Paterson, J op.cit,, P 380
30
statement to say ‘ includes but not limited to’ the potential heads of loss items

listed. Jennings57 favours the former approach on the basis of clarity, but the

latter is the one most commonly used throughout the UK oil and Gas industry

standard documentation.

2.4.3 – Limitation of Liability

As previously discussed each party to a contract has responsibilities and

obligations placed upon them – issues that each party will be liable for.

Gordon explains that a limitation of liability clause

seeks to limit a party’s liability not by reference to particular

species of loss, but by reference to a total sum payable58.

The limit on liability that is placed on a contract is largely dependant on the

negotiations of the parties. The chosen figure is either stated as a lump sum

figure or as proportion of the value of the contract. The figure included

usually takes into consideration the insurance provisions in place, to ensure

that neither party is unreasonably ‘out of pocket’. These liability caps are very

common within Oil and gas industry contracts, especially where parties are

not prepared to agree a mutual indemnity and/or consequential loss regime.

Logic standard contract have the option to limit the liability to a certain figure,

however specific areas of liability are not covered and should be dealt with in

the special conditions of contract.

From the discussions above it is clear that there is a potential for massive

exposure to parties who enter into a contract that does not contain a suitable

indemnity regime, or that does not exclude consequential loss, or alternatively

57
Jennings, A, (1999) FPSO agreements in David, M, Oil and Gas infrastructure and mid stream agreements
(1999), Sweet & Maxwell at 210.
58
Gordon, G & Paterson, J op.cit, P 381

31
does not limit liability thus leaving one or more parties to the contract

exposed to potentially large financial losses.

This chapter has covered the concept of contract formation both generally and

in respect of the Oil and Gas industry and concludes that the general

principles must be applied in all Oil and Gas related contracts. It then

discussed key contract clauses concerned with risk mitigation, with the key

focus on indemnities and limitation of liability. There are other key contract

clauses that should be given careful consideration when drafting a contract,

however thee have not been included in this report.

One way in which Oil and Gas companies can ensure that all the key clauses

are covered by the contract is to use a standard form/ model contract such at

LOGIC standard terms, which have been drafted by a committee representing

operators and contractors within the UKCS oil and Gas industry. The use of

model contract in general and Oil and Gas specific model contracts, such as

LOGIC, are discussed in the next chapter.

32
Chapter 3 – Oil and Gas Model Contracts

3.1 Introduction

It has already been established that when drafting a contract that it is

essential that the appropriate risk mitigation steps are taken as well as

consideration given to a number of other key clauses. One way of ensuring

that these key clauses are included is through the use of model contracts.

These model contracts provide a sound basis on which to build a solid

contract.

The use of model contracts shall be discussed in general terms before focusing

in the standard forms of contracts that are currently in use within the UKCS Oil

and Gas industry.

3.2 Introduction to model contracts

Everyday within the oil and gas industry millions of contractual transactions

are concluded, therefore it is clear that the oil and gas industry stands to

benefit significantly from standardization. Many of these contracts involve

large sums of money, considerable risk, vast liabilities and many difficult

issues. Consequently, depending on their complexity, they can often take

months and sometimes years to negotiate, draft and sign. Therefore

standardisation of model contracts can save months of management time in

each and every negotiation.

In the past companies would create a set of contracts that represented their

own preferred precedent. Individual one-on-one negotiations with

counterparties would result in these contracts being altered to the point where

they were mutually agreeable. This process often took a long time and used a

33
significant amount of resources. It was not unusual that where two companies

had previously reached consensus on a particular form of contract to govern a

prior transaction, the negotiation process would often start over again each

time a new agreement was required.

Over the years of contracting using the method outlined above, commercial

and legal personnel in the industry finally started to recognise that there were

a multitude of benefits in cooperating to develop model contracts that were

consistently and regularly used by all.

Over the last several decades, the industry has taken this

alternative approach and worked on a cooperative basis to

develop and use various types of petroleum model contracts to


59
gain the benefits of standardization and efficiency.

The concept of model contract goes by many different names,

including ‘model form’, ‘model agreement’, ‘model form contracts’ to

name a few, for the purpose of this study they shall be referred to as

model contracts.

Generally speaking model contracts have been developed and endorsed by

industry organisations on a cooperative basis to achieve wide industry

acceptance and usage. Within the oil and gas industry model contracts are

used by numerous parties, the most common type is that between oil

companies. However in some countries government has developed model

59
Martin, TJ and Park JJ (2010)- Global petroleum industry model contracts revisited: higher, faster,
stronger, Journal of World Energy Law & Business, Vol. 3, No. 1, p 6
34
contracts for production sharing agreements and are used to grant petroleum

licences. Onorato60 believes

Despite some disagreement within the industry on the necessity

of this element, a State is best served by having its own

purpose-crafted contractual format from which to commence the

negotiation of Petroleum Agreements.

3.3 Advantages and Disadvantages to the Use of Model Contracts

The creation of model contracts involves a significant degree of effort by the

organisation that develops and maintains the model. Therefore it is essential

to establish what the benefits of such a model, and the benefits to those

companies who choose to use it. Martin61 believes there to be many

advantages and disadvantages to using model contracts.

Table 3.3 – A summary of the advantages and disadvantages of Model


contracts

Advantages of Model Disadvantages of Model


contracts contracts
Cost efficiency Relative Bargaining Power
Use of Model contracts by under
Speed qualified users
Risk avoidance Model Paralysis
Higher quality contracts Inappropriate use
Wide Industry Understanding Flawed Models
Improved Relationships
Association Development

One of the main advantages of model contracts it there ability to provide cost

efficiency. There are significant savings of time and costs involved in the use

60
Onorato, W and Park JJ, (2001)World petroleum legislation: Frameworks that foster oil and gas
development, 39(1)
Alta L Rev 95, 70–126.
61
Martin, TJ and Park JJ Op.cit p 8-12
35
of model contracts. Following on from this, another advantage of model

contracts is the speed at which transactions can be negotiated, completed and

undertaken if the contract documents can be quickly agreed. A further

advantage is risk avoidance, often due to the time constraint involved work

commences before the contract has been concluded. Model contracts help to

minimise this risk as the process of contract conclusion is reached at a quicker

rate which means companies are exposed to less risk. It is also argued that

because model contracts are developed by teams of industry experts, that

most model contracts are generally better drafted than contracts that are

produced by parties who are not using model contracts. Martin 62 then goes on

to discuss the advantage of an industry wide understanding .Well-prepared

model contracts that become widely used as the industry standard result in

consistent treatment of similar transactions across the industry. Better

understanding of the transactions typically results. With increased consistency

and understanding, parties inherently reduce potential grounds for dispute

and therefore, their litigation risk. This is supported by a developing body of

academic and judicial interpretation of the model contracts being used. All of

this reduces the cost and risk of doing business. By minimising the number of

issues that need to be addressed, model contracts provide to the industry the

ability to build and maintain strong counterparty relationships through

abbreviated negotiation sessions that are focused on the key issues at stake.

Many industry associations have built their reputation for usefulness in large

part on the fact that they have brought together the best teams and created

and maintained the best model contracts for the industry. There are also

learning and educational opportunities associated with the creation of a

model. Younger and less experienced participants in the drafting of a model

contract will learn more in such drafting committees than by any other means.

62
Ibid
36
As well as there being a number of advantages to using model contracts,

there are also a number of issues that industry associates should consider

when deciding whether or not create and maintain new model contracts.

Martin63 explains one of the main disadvantages is relative bargaining power.

The general approach to model contracts is that most associations that create

an industry model seek to create a balanced and fair agreement that takes

into account the interests of all parties to the model contract.

However, the real world is often different from this, with one party being

stronger than the other, this leads to the stronger party will propose changes

to the model to benefit itself. Therefore to make the transaction work the

weaker party must accept this. Another disadvantage of the model contracts

is that they are often used by people who are under qualified as there is a

perception within some areas of the industry that little knowledge of contract

negotiation is required due to the model contracts already having been

agreed. A further disadvantage of model contracts is model paralysis which

relates the foregoing, in basis terms one party will propose a change that is

suitable and reasonable in the circumstances, but involves a departure from

the provisions of the model. The counterparty will object to the change on the

basis that the model contract is what the industry has agreed and should not

be amended. Often within the oil and gas industry there is a tendency once a

model contract has been agreed that parties try to make this model fit all

every transaction, whether or not the model is actually suited to that type of

transaction. Finally it is fair to say that some models may contain flaws. This

is often because issues where not identified at creation or just simply because

63
Ibid
37
of the nature of the oil and gas industry where everything is continually

changing. Likewise there are some model contracts developed specifically

developed for different sectors and only reflect that sectors view point.

All the main advantages and disadvantaged have been discussed in turn,

Martin64 believes

Overall, the advantages of model contracts far outweigh their

disadvantages. Most of the disadvantages that are identified

above can be avoided through proper use of the model contract.

Therefore, it is clear that there are considerable benefits and the

weaknesses can generally be avoided by skilled, knowledgeable

users of model contracts.

From the foregoing it is clear there are a number of advantages and

disadvantages of using model contracts. These model contracts play an important

role within the UKCS Oil and Gas industry, some of which are discussed below.

3.4 Model contracts within the UK Oil and Gas industry

The UK gas industry over the last few decade has developed a number of model

contracts to assist companies working within the industry. Perhaps the most

widely used and well known are the CRINE contracts, recently superseded by

LOGIC contracts.

3.4.1 Cost Reduction for a New Era (CRINE)

The North Sea has traditionally been an expensive place to explore for and

produce oil. This was because the province was born out of high oil prices from

64
Martin, TJ and Park JJ op.cit p12
38
the Middle East wars; cost was not a priority issue and the UK's main objective in

the early days of the North Sea was self-sufficiency in oil. The bottom line was

that various forms of inefficiency resulted in increased costs to industry. As a

result of these inefficiencies, and the cratering of the oil price during the 1990's, a

new initiative was born in 1992 - the Cost Reduction Initiative in the New Era

(CRINE) 65.

The initiative was steered by a committee comprised of senior executives from all

sectors of the UK offshore industry and its main objective was simply to find ways

of reducing capital and operational costs on the UKCS. The CRINE report,

published in late 1993, made several findings. One of the most fundamental of

these was that an adversarial relationship existed between operators and

contractors in the North Sea.

In 1996 when it became clear that the whole industry supply chain must be

engaged in finding new and innovative ways of reducing costs and working

more efficiently, CRINE evolved into 'CRINE Network' - a body comprising

representatives of all sides of industry including operators, contractors and

suppliers of equipment. This marked the beginning of the creation and

formulation of a series of new bodies and initiatives designed to reduce costs and

promote the efficiency of the North Sea as an environment for doing business.

There are currently over thirty initiatives that focus on areas key to the

industry, including undeveloped discoveries, stimulation of exploration,

development of brown fields and technology and innovation.

One of the major ways in which the CRINE initiative sought to reduce costs was

through the fostering of a co-operative relationship between operators and

contractors with the use of standard contracts. These were drafted by participants

65
CRINE (1999), Executive Summary, Oil and Gas Supply Chain, CRINE Network, London.
39
from all sides of industry and are used on a regular basis in the North Sea oil

industry. The standardisation of many of the contracts used has greatly

reduced the inefficiencies, which previously existed, although it should be noted

that most operators and contractors have developed their own standard

'deviations' from the standard CRINE documents, and hence it is still necessary

to engage in very detailed negotiations to conclude a contract.

The lack of standardisation prevailing prior to CRINE meant that the contract

forms issued by the operators would normally be drafted in the operator's

favour, anticipating and receiving lengthy qualifications from tendering

contractors. The contractors, in turn, demanded more concessions than they

expected the operators to agree to as 'negotiation' was expected. Clearly, the

whole process required lengthy discussion and negotiation, as well as a significant

amount of time as people from both sides were required to check and re-check all

of the terms and conditions being negotiated on a contract-by-contract basis to

ensure that they were not being left open to unexpected or unacceptable

liabilities. It has been stated that the development of CRINE contracts was

difficult and the attempt was almost abandoned due to a lack of agreement.

The Standard Contracts Committee which drafted the original model contracts

and which was a part of CRINE and later CRINE Network is now a part of LOGIC

('Leading Oil and Gas Industry Competitiveness') -an industry funded body, lead

by representatives from the Department of Trade and Industry (DTI) and trade

associations (including the UK Offshore Operator's Association (UKOOA)66, the

Offshore Contractor's Association (OCA), the International Maritime

Contractor's Association (IMCA), the International Association of Drilling

Contractors (IADC), the Energy Industries Council (EIC) and the Well Services

66
Which has now been superseded by Oil and Gas UK (OGUK)
40
Contractors Association (WSCA)) which works with companies throughout the oil

and gas industry to promote collaboration and competitiveness. 67

3.4.2 Leading Oil and Gas Industry Competitiveness – LOGIC

LOGIC was created in 1999 by the government's Oil & Gas Industry Task Force

(now PILOT) to stimulate supply chain collaboration and improve the

competitiveness of the UK Continental Shelf. With initial funding from the DTI

and the industry, LOGIC was the vehicle used for delivering workshops and

seminars on supply chain management, in-company assessments, share fairs

and collaboration on logistics, as well as managing a number of cross-industry

projects such as Vantage POB, the Master Deed, Industry Mutual Hold

Harmless Deeds and Industry Standard Contracts68.

The model contracts only comprise those general terms and conditions where

one could reasonably expect that different contracts between different parties

concerning a similar subject matter might be similar. They basically provide a

skeleton boilerplate framework, which parties can amend as appropriate and upon

which they can include their special conditions to suit their particular needs.

The broad consensus is that CRINE/LOGIC model contracts have resulted in

significant gains in efficiency and reduction in costs - both financially and in terms

of the hidden costs of regular confrontation between industry parties in

contract negotiations.

In 2000, approximately 70% of the contracts let on the UKCS are

estimated to have used the Standard Contracts as their model. 69

67
ibid
68
http://www.logic-oil.com/about.cfm - standard contracts, last accessed 2nd May 2010.
69
http://www.logic-oil.com/contracts.cfm - standard contracts, last accessed 2nd May 2010.
41
In the 2001 UKOOA survey of usage, over 95% of senior oil

company managers said they supported the principles of

Standard Contracts.70

The purpose of the model General Conditions of Contract is to provide a

commonly known and understood foundation around which the Company and

the Contractor can build their particular requirements.

This eliminates much of the effort historically spent reviewing, qualifying and

reviewing qualifications to the many different sets of general conditions

offered by the industry. That time is now available to focus on developing

specific terms directly beneficial to the work to be done.71

However the contracts so not meet all the requirements of all companies and

therefore time will often still be spent reviewing and qualifying the contracts,

so bring them inline with specific company requirements.

There are currently eleven different standard contracts covering Construction,

Marine Construction, Design, Mobile Drilling Rigs, Offshore Services, Onshore

Services, Purchase Order Terms and Conditions, Supply of Major Items of Plant

and Equipment, Well Services and Contracts and Sub-Contracts for Small /

Medium Enterprises Services. A brief description of each contract and under

what circumstance it is used can be found in Appendix A.

These contracts have provided the Oil and Gas industry a basis on which to

contract. However there are still certain areas within these model contracts

that need further attention such as the risk mitigation clauses. As discussed in

chapter 2, the LOGIC indemnity clauses contain broad definitions of the

70
ibid
71
http://www.logic-oil.com/contracts2.cfm - guidance notes , last accessed 26th April 2010.
42
parties covered by the contract, there may however be many different

contractors working on an installation at anyone time, with very few of these

having a direct contractual relationship. This regrettably allows in contractual

gaps to appear within the indemnity chain outlined above. Therefore on July

1, 2002 the Industry Mutual Hold Harmless (IMHH) Scheme went live. The

primary objective of the Scheme was to address the contractual gap, which

has traditionally existed between contractors working on the UK Continental

Shelf.

3.4.3 Industry Mutual Hold Harmless Scheme

The IMHH Scheme has evolved from popular demand in the industry for clarity

in allocation of liabilities and consequent avoidance of overlapping insurance of

identical risks.72

A committee was established under the auspices of LOGIC to review the issue

and propose a solution. The produced an industry mutual hold harmless deed

(the “IMHH Deed”), allowing all offshore oil and gas industry contractors to

sign up to a mutual hold harmless scheme (the “IMHH Scheme”). The IMHH

Deed adopts mechanisms commonly used in the offshore oil and gas industry

in the allocation of risk for personnel, property and consequential loss. As

discussed above.

There can be many contractors working alongside each other on a production

facility at any one time. Unless the Operator specifically provides to the

contrary, or the contractors make specific arrangements with each other on a

case by case basis, such contractors will be third parties to each other as there

is no contractual arrangement between them.

72
http://www.imhh.com/about.cfm - last accessed 03/05/2010
43
These third party contractors will be liable to each other for any injury and loss

they cause through their negligence. With the high frequency of incidents and

the drive to take action through the courts the cost to the industry of resolving

these claims is assessed to be enormous.

The primary objective of the IMHH Scheme is to address the contractual gap

which traditionally exists between contractors working on the UKCS. For some

time several Operators have implemented mutual hold harmless schemes as

part of their normal contracting process, but these are tied to specific

contracts for specific facilities. While this deals with a part of the problem it

only accounts for a small proportion of the industry activity with many gaps

remaining. It is also an exercise that is repeated with every contracting

campaign.

The IMHH Scheme is designed to be used by contractors only. It is envisaged

that approximately 10073 contractors will be requested to sign up to the

Scheme as core contractors to the Deed. However there are some Operators

who have signed up to IMHH, this is evident form the questionnaire results in

chapter 5.

An important factor in the success of the scheme is Operator support and

promotion of the scheme. The ultimate target is total contractor participation

but the IMHH Scheme will be a success if it obtains support from the majority

of contractors regularly providing services to the offshore oil and gas industry.

73
ibid
44
The principal liabilities addressed within the IMHH Deed are as follows 74:

1. Personal injury, sickness, disease or death.

2. Loss or damage to property.

3. Consequential loss (as defined in the IMHH Deed).

Risks being specifically excluded are:

1. Those concerning loss or damage to property or consequential loss arising

out of (i) the carriage of goods by sea; (ii) the provision of Emergency

Response and Rescue Vessel(s) or services associated with them; and (iii)

Heavy Lift Vessel(s).

2. Any activities involving transport by air.

3. The IMHH Deed will not take precedence over existing contractual

arrangements, nor over later contractual arrangements between

participants. It operates between contractors where there is no other

contractual arrangement in place between them, and contractors are also

free to expressly apply the IMHH Deed, if they wish.

Benefits of the IMHH can be summarised as follows75:

 Clarity in allocation of the key areas of risk.

 Financial benefits from reduced legal fees and reduction on resource

needs.

 More effective management of key areas of risk.

 Reduced time and confrontation negotiating contractual responsibility

and indemnity matters.

 Enabler to greater industry collaboration.

 Potential for reduced insurance premiums.

74
http://www.imhh.com/about.cfm - last accessed 03/05/2010
75
http://www.imhh.com/benefits.cfm - last accessed 03/05/2010
45
 Cost effective and efficient means of improved risk management for

small and medium sized enterprises (SMEs).

It is believed that the industry as whole will make a significant financial saving

from an effective implementation of the IMHH Scheme. There may also be

benefit in reduced insurance premiums. The legal burden incurred by the oil

and gas industry is also, to some extent, reflected in the insurance industry.

Reduced claims and counter claims may lead to a reduced level of legal fees

for insurers which would hopefully have a knock-on effect on insurance

premiums. However, risks in the industry will not change: the IMHH Scheme is

simply a method of allocating liability. The IMHH Scheme should reduce the

need for “double insurance” but does not remove the need for insurance

altogether76. From this discussion it is clear that the IMHH plays a crucial role

in mitigating risk within the Oil and Gas industry, where there are no formal

contracts in place.

There are also a number of other model contracts within the UKCS oil and Gas

industry, some of which are discussed below.

3.4.4 Additional Model Contracts within UK Oil and Gas industry

Since the drafting of the CRINE/LOGIC model contracts, a series of standard

agreements have been developed under the auspices of the Oil and Gas UK with

the aim of improving working relationships between Licensees and streamlining

commercial procedures.

3.4.4.1 First Point Assessment Limited

Included within this is the use of First Point Assessment Limited (FPAL). FPAL was

set up in 1996 to provide a one stop website where customers could review the

76
http://www.imhh.com/about.cfm - last accessed 03/05/2010
46
skills available in the market for any particular piece of work they required77. As

well as being a supply chain database, FPAL is a key tool used by oil and gas

purchasers to identify and select current and potential suppliers when awarding

contracts. One of the most recent tools available from FPAL are model ITT

templates. These templates are available to download for free for the purpose of

simplifying the contracting process and providing an easier and faster way to

produce, issue and respond to ITT/bid packages, there are templates for – drilling

rigs, marine construction, topside support, well services and general

services.78The introduction of these model ITT’s from the findings in chapter 6,

has not been well received with many companies not being aware of there

existence, let a lone the benefits they could bring. There have however been

other agreements which have been adopted into everyday practice much more

successfully; two of these are discussed below.

3.4.4.2 UKCS Joint Operating Agreement

Like all other aspects of the oil and gas industry it was recognised that there

needed to be standardisation of these agreements. The first model JOA was

developed in the US in 1956, Association of Petroleum Landsmen Model Form

Operating Agreement Form 610. This model has since been revised but

remains similar to the 1956 original. Styles79 states AAPL Form 610 was an

influential model on the early UKCS JOAs which were introduced in the wake of

the first licensing round in 1964. This was evident in the fifth licensing round

where all JOA has to include the then State-owned British National Oil

Corporation (BNOC) and the JOA had to be in terms acceptable to BNOC.

BNOC took a model form JOA drafted by UKOOA a year earlier, adapted it to

77
http://www.fpal.com – last accessed 9th may 2010.
78
Adapted from - http://www.fpal.com – last accessed 9th may 2010.
79
Gordon, G & Paterson, J op.cit p265
47
its needs and produced the “BNOC Proforma Joint Operating Agreement for

Fifth Round Licences”.

This pro-forma JOA proves to be a workable document which

secured widespread industry acceptance. Its legacy continues to

be seen in UKCS JOAs to this day, long after the nationalised

BNOC itself has ceased to exist.80

In 2002, in advance of the 20th Licensing round, a group of industry lawyers

working under the support of UKOOA, produced the 20th round Draft JOA. this

had proven to be an influential model, with the latest revision taking place in

2009.

The purpose of the UKCS Joint operating agreement is to provide a sound

basis on which co-venturers can manage shared operations on their licence,

from selection and duties of the operator to apportionment of rewards and

liabilities. The 2009 update took place to ensure the JOA reflects current UKCS

practice and to ensure consistency with the industry standard

Decommissioning Security Agreement (DSA) and the Energy Act 2008.

Paul Dymond from UK oil and gas commented

With input from a wide cross-section of industry, the model JOA

has been updated to reflect new regulations and common

practices over the last five years and to rectify some

inconsistencies within earlier versions. We hope this helps parties

80
Gordon, G & Paterson, J op.cit p265
48
quickly establish the arrangements needed to underpin successful

partnerships between co-venturers.81

Another example of a successful agreement was the Master Deed

introduce for offshore licenses.

3.4.4.4 Master Deed

The "Master Deed" was developed by Oil & Gas UK Progressing Partnership

Working Group (PPWG), BERR, and a number of other interested

organisations. It greatly expedites the transfer of UKCS offshore licence

interests and other agreements relating to associated assets and

infrastructure. It also introduces a standard pre-emption regime to give

confidence to incoming companies.

The offshore oil industry has given the Master Deed broad

support, nearly 260 companies holding more than 99% of licence

interests have signed up already82.

In the past deals were often significantly delayed by the need to get a range of

signatures applied to many documents, even when all parties are content with

it. The Master Deed creates a mechanism which simplifies the complex and

time-consuming procedures which were previously involved in the sale and

purchase of offshore licence interests in the UKCS. Under the Master Deed,

licensees have appointed UKCS Administrator Limited to act as an

administrator to the Master Deed and perform the execution of pro-forma

documents. The use of pro-forma ensures that the documentation process is

faster and less complex. The main benefit of the master deed is that it

standardises the documentation process for UKCS transfers of license interests

81
Dymond, P, Oil & Gas UK presents suite of model agreements to improve industry efficiency, 16/02/2009,
accessed at http://www.oilandgasuk.co.uk/news/news.cfm/newsid/379 on 1/5/2010
82
http://www.masterdeed.com/about.cfm - last accessed 03/05/2010
49
which in turn speeds up the transfer process significantly. This creates a more

efficient commercial environment and encourages new entrants to invest in

North Sea assets. Complex commercial and legal structures are no longer a

barrier to entry for new entrants.

There are also a number of other standard forms available within the UKCS oil

and Gas industry but these have not been considered for the purposes of this

paper.

From the foregoing discussion it is clear that there are many advantages as

well as disadvantages to the use of model The introduction of CRINE/LOGIC

within the UKCS oil and Gas industry has brought with it a number of

efficiencies in the way that contracts are drafted and negotiated. These

efficiencies were gained through the standardisation of contract documents,

saving with the aim to save time and money as they eliminate the need for

lengthy contract negotiations. However these standard contracts are not

without fault, as they do not allow for every eventuality.

It is always important to bear in mind is that although the entirety of

the model contract it balanced the individual clauses are not. This is

because on the trade off that went on in the drafting the suppliers

won some arguments about the wording in some clauses and buyers

won in others. Hence the model contracts have the appearance

reasonable and tempered overall but in the detail there are many

comprises and benefits to one party over the other. This is why

special conditions are so widespread.83

Further discussion on special conditions is contained within chapter 6.

83
Senior Supply chain professional involved in drafting of Logic – information provided in response to
questionnaire/ interview process
50
Chapter 4 –Research Methodology

4.1 Introduction

This chapter illustrates the research methodology undertaken to complete this

study. Identification of the particular research methods required, the

information and data gathering approaches to be used, and developing an

action plan setting out the different stages and timescales of a study, are all

important in demonstrating the process which will be followed to address the

research aims and objectives, hypotheses or research questions.

Marchington84 states that methodology is about finding the most appropriate

method of research to fit aims and projected outcomes. Hence, the

methodology provides the sense of vision of where the analyst wants to go

with the research. Methodology is important because, “the methods you use

will significantly affect the answers you get”85. Based upon the research aim

and objectives, consideration is given to the appropriate research strategy

with justification as to why it was chosen. The data collection technique is

presented along with discussion on how this framework was constructed from

the gathered data in the literature review.

4.2 Research objectives

This study aims to evaluate the extent to which oil and gas companies use oil

and gas industry standard contracts, whilst comparing the quantity and types

of qualifications/ amendments to the standard templates. From the literature

contained within chapters 2 and 3, it is clear that there is a multitude of

84
Marchington, M., and Wilkinson, A., (2003). People Management and Development. 2d Edition. London:
CIPD

85
BLAXTER, L., HUGHES, C. and TIGHT, M., (2006). How to research. First ed. Berkshire: Open
University Press.

51
information regarding general best practice for contract formation and the

general use on oil and gas standard contracts. However there has a minimal

amount of research conducted specific to the types of companies that use

standard contracts and they types of qualifications/special conditions they add

to the UKCS oil and gas industry standard contracts. Therefore, in order to

achieve the aim, comparison of primary and secondary research is considered

necessary. The objectives from the secondary research are as follows:

 to critically analyse the use of Standard LOGIC contracts within the UK

Oil and Gas industry;

 to evaluate whether there is a trend as to what types of companies use

LOGIC and the reasons for doing so;

 an evaluation of those companies who choose not to use LOGIC and the

reasons for this.

 to identify and discuss alternative contracting methods used by various

companies, in particular ConocoPhillips, who use a variety of bespoke

contracts,

4.3 Primary and Secondary Research

For this study a combination of primary and secondary research was

undertaken, each is discussed in turn below.

4.3.1 Secondary Research

Secondary research involves processing data that has already been collected

by previous researchers. It refers to consultation of previous studies and

findings such as reports, press articles and previous market research projects

in order to come to a conclusion.86

86
http://www.businessteacher.org.uk/markets/primary-secondary-market-research/ last accessed 2/05/2010
52
The literature reviewed has been utilised to define the concept, display

elements and to demonstrate the importance of contracts within the UKCS oil

and gas industry. Additional literature has been used to identify and provide

details of current trends with regards to the use of model contract within the

UKCS oil and gas industry. The sources used to achieve this include text

books, academic research journals, industry trade journals, information from

industry trade bodies and newspaper articles.

The literature review has allowed the author to formulate theoretical best

practices in order to develop specific research questions for the primary

research element of this study. It is felt that this offers the study valuable

data with specific examples of how industry standard contracts are used and

why. The best practices are compared with the primary research analysis in

chapter 6.

4.3.2 Primary Research

Primary data is collected for a particular purpose and is new information. This

is conducted using some means of questioning usually via a survey or

interviews, or the information can be gathered through observation. It is

typically more time-consuming and expensive to collect than secondary data,

and is often the second stage in a research project, following secondary

research.

Preece87 states that primary research “involves the researcher in direct

experience and observation of the real world”. He suggests that primary

research shapes the body of a research project, and is almost always

necessary for research to be viewed as credible.

87
Preece, R., 1994. Starting research. 1st Edition. London: Pinter Publishers, p. 80
53
Primary research data can be separated into two main categories: quantitative

and qualitative data.

Table 4.1 Fundamental differences between quantitative and


qualitative research strategies88

Quantitative Qualitative
Principle orientation to Inductive;
the role of theory in Deductive; testing of generation of
relation to research theory theory

Epistemological Natural Science model,


orientation in particular positivism Interpretivism

Ontological Orientation Objectivism Constructionism

In summary Qualitative research explores attitudes, behaviour and

experiences through such methods as interviews or focus groups. It attempts

to get an in-depth opinion from participants. As it is attitudes, behaviour and

experiences which are important, fewer people take part in the research, but

the contact with these people tends to last a lot longer. Under the umbrella of

qualitative research there are many different methodologies.

Quantitative research generates statistics through the use of large-scale

survey research, using methods such as questionnaires or structured

interviews. If a market researcher has stopped you on the streets, or you have

filled in a questionnaire which has arrived through the post, this falls under the

umbrella of quantitative research. This type of research reaches many more

people, but the contact with those people is much quicker than it is in

qualitative research.

Both types of research were exercised for this study. Firstly quantitative

research by the way of a survey in the form of a questionnaire was carried

88
Bryman,A, (2004) Social Research Methods, 2nd Edition, Oxford University Press, P20
54
out. There are a number of advantages and disadvantages89 associated with

undertaking a survey, these are listed below -

Advantages:

• With an appropriate sample, surveys may aim at representation and provide

generalised results.

• Surveys can be relatively easy to administer, and need not require any

fieldwork.

• Surveys may be repeated in the future or in different settings to allow

Comparisons to be made.

• With a good response rate, surveys can provide a lot of data relatively

quickly.

Disadvantages:

• The data, in the form of tables, pie charts and statistics, become the main

focus of the research report, with a loss of linkage to wider theories and

issues.

• The data provide snapshots of points in time rather than a focus on the

underlying processes and changes.

• The researcher is often not in a position to check first hand the

understandings of the respondents to the questions asked. Issues of

truthfulness and accuracy are thereby raised.

• The survey relies on breadth rather than depth for its validity. This is a

crucial issue for small-scale researchers.

On deciding to use a questionnaire90 for date gathering it was essential to

89
Blaxter L, Hughes c and Tight, M,(2006) How to research, 3rd edition, open university press, p79
90
Questionnaire attached in Appendix B
55
assess the reliability and validity of this technique. Bell and Opie91 define

reliability as “the extent to which a test or procedure produces similar results

under similar conditions and on different occasions”. Validity is defined as

“whether an item or instrument measures or describes what it is supposed to

measure or describe”92 However, they caution that how a research study is

structured governs both the research findings which can, and cannot, be

inferred. Therefore when choosing to use a questionnaire it was essential that

it retrieved the most information it could without being cumbersome on the

respondent completing it. Therefore when generating the questionnaire a

combination of open and closed questions were asked. Open questions give

respondents a greater freedom to answer the questions because they answer

in a way that suits there interpretation93. Closed questions limit the number of

possible answers to be given.94The main reason for combining the two types of

questions was that open questions are a useful follow up to closed questions

as they often give the rational behind the closed question. Once the

questionnaire had been compiled, it was critical to the study that the correct

respondents were identified. This involved selecting the most appropriate

research sample. this is discussed in paragraph 4.4 below.

Secondly qualitative research was undertaken by the way of interview. These

interviews took the form of informal semi structured face to face interviews

with the Procurement Manager UK and the North Sea Contracting Supervisor

at ConocoPhillips UK Limited. A semi structured interview is where,

91
BELL, J. and OPIE, C., (2002). Learning from research. 1st Edition, Buckingham: Open University Press.
P245
92
BELL, J. and OPIE, C.op.cit P249
93
May, T (2001) Social Research, issues methods and processes, 3rd Edition, Oxford university press page
102
94
Ibid
56
Interviewer generally starts with some defined questioning plan,

but pursue a more conversational style of interview that may see

questions answered in an order more natural to the flow of

conversation.95

This approach was used as author already new the interviewees and therefore

felt this was the most suitable approach. The questionnaire discussed above

was used as the basis of the interview. The purpose of the interview was to

get more detailed answers for some of the open questions as well as any

additional information where possible to assist with the study of contracting

methods used at ConocoPhillips UK limited which is discussed in chapter 5.

4.4 Research Sample

There are numerous Oil and Gas operators, contractors and service companies

within the local area. The timescale imposed meant that it was not possible to

obtain survey responses for all these companies. Therefore probability

sampling was used to ensure so that a representative cross section of

companies was selected. To certify that the companies selected where

classified correctly into Subsea Engineering companies, Subsea Companies,

Operators, drilling companies and service companies, First Point Assessment

Limited (FPAL) was used. FPAL was set up in 1996 to provide a one stop website

where customers could review the skills available in the market for any

particular piece of work they required96. Almost every contractor in the UK North

Sea industry is registered on FPAL. FPAL has a number of work, services,

tools/equipment and skills codes and when registering, a contractor chooses

which codes it will register under. The codes are fairly detailed. Once the

companies had been selected connection was made via email, the contact details

were obtained from FPAL or via author’s business knowledge.


95
O’Leary, Z, (2004), The Essential Guide to doing research, Sage Publications, p164
96
http://www.fpal.com – last accessed 9th may 2010.
57
One the companies had been identified, the questionnaire was issued, via email,

to persons working with the company’s contracts department, or supply chain

department. This target group was selected to ensure comprehensive answers

were received. This rational was also applied when selecting the appropriate

personnel with whom to conduct interviews.

4.5 Data Analysis

In order for analysis the gathered data must be organised into a manageable

format. This was completed manually by separating the data into sets. The

information is segregated by company type, the broad heading used to do this

were Subsea Engineering companies, Subsea Companies, Operators, Drilling

Companies and Service Companies.

The information that emerged from each question was then collated into a

spreadsheet for all the closed questions in order to allow the fragments of data

to be brought together into categories with shared properties. For the Open

questions key points of each question were transcribed onto a word document

as a quick reference guide for completing the research findings. Appendix C

contains all results tables collected from the questionnaire.

4.6 Research Limitations

There are a number of possible research limitations to this study which are

discussed as follows:

 The main constraint on this study was time, which limited the period

which could be allocated to data collection.

58
 Follow up interviews could not be conducted on the questionnaire

respondents within the available time frame.

 Oil and Gas UK ran a one day workshop, called Model contractual

Supply Chain Solutions on the 28th April 2010, but due to the cost of the

workshop, work commitments and the timing on the course in respect

to submission date, it was not possible to attend this workshop.

Information about content of the course was requested but not

obtained.

59
Chapter 5 – Case Study: Contracting Philosophy at ConocoPhillips UK

Limited

As discussed in earlier chapters, over the past few decades the UK

government has introduced a number of Model contracts that can be used by

Oil and Gas companies. The main advantages of these model contracts is that

it saves time and money, as there is less time spent negotiating contact,

which in turn saves money. However not all companies within the UKCS use

model contract such as LOGIC. One of the findings from the questionnaire

was that 3 of the respondent companies said they did not use industry

standard contracts. ConocoPhillips UK Limited was one of these companies. A

full discussion of the questionnaire results follows in chapter 6.

This chapter provides background information to the origins of ConocoPhillips

and the activities in which they are involved. Thereafter this chapter reviews

the contracting structures used at ConocoPhillips and the reasons for such a

structure. It will also review why ConocoPhillips choose not to use Standard

Contracting models such as LOGIC.

5.1 Background to ConocoPhillips

ConocoPhillips is an international, integrated energy company. It is the third-

largest integrated energy company in the United States based on market

capitalisation, as well as proved reserves and production of oil and natural

gas, and the second-largest refiner in the United States. Worldwide, of

nongovernment-controlled companies, ConocoPhillips is the seventh-largest

holder of proved reserves and the fourth-largest refiner.

60
Headquartered in Houston, Texas, ConocoPhillips operates in more than 30

countries. As of 31 December 2009, the company had around 30,000

employees worldwide and assets of $153 billion97.

The company has four core activities worldwide 98:

1. Exploration and Production

2. Refining, marketing, supply and transportation

3. Natural Gas Gathering, processing and Marketing

4. Chemicals and plastics

In addition, the company is investing in several emerging businesses that

provide current and future growth opportunities. These efforts include

development of integrated power generation projects to support exploration

and production and refining and marketing strategies and business objectives;

carbons-to-liquids processes that convert carbon into a wide range of

transportable products; and a variety of technology solutions.

ConocoPhillips’ upstream involvement in the United Kingdom began in

September 1964 when acreage was awarded to the company in the first U.K.

licensing round. In 1968, the Viking gas field was discovered and first gas was

produced in 1972. Since then, the U.K. portfolio has grown to include

additional operated assts, as well as interests in non-operated assets99.

In the central North Sea, the company is operator of, or has an interest in a

number of fields including Britannia, Britannia Satellites (BritSats), J-Block,

Jasmine and MacCulloch.

97
ConocoPhillips fact sheet – January 2010
98
Adapted from - http://www.conocophillips.com/EN/about/who_we_are/our_business/Pages/index.aspx -
last accessed 10 April 2010.
99
ConocoPhillips fact sheet – January 2010
61
In the southern North Sea, ConocoPhillips operates the Lincolnshire Offshore

Gas Gathering System, the Viking transportation system, the Caister Murdoch

transportation system and a portfolio of around 30 gas fields. The company

also has non-operated interests in the southern North Sea and holds interests

in the East Irish Sea.

Onshore, it owns the Rivers Terminal at Barrow-in-Furness and operates the

Theddlethorpe gas terminal and the Teesside Oil terminal. It also holds a non-

operated interest in the Interconnector pipeline. Its downstream operations

include the Humber Refinery and the Immingham Combined Heat and Power

Plant and its marketing activities in the UK consist of JET branded retail sites,

which are owned and operated by independent dealers.

5.2 Reasons why ConocoPhillips UK Limited do not use LOGIC

As part of the informal interviews conducted with, North Sea Contracting

Supervisor and Procurement Manager UK at ConocoPhillips UK Limited they

advised of the main reasons that ConocoPhillips do not currently use any

LOGIC standard Contracts, these are detailed below.

Historically it has always been ConocoPhillips UK Limited company policy to

only use its own Company standard terms and conditions, this was the case

even before Conoco and Phillips merged in August 2002. On several different

occasions ConocoPhillips UK Limited have investigated if there would be any

benefit of adopting some of the LOGIC standard contracts, however on review

it has always been decided that the LOGIC standard terms would need to be

heavily qualified to cover the specific needs of the company, therefore it would

not be in the Companies best interest, as this would lead to longer and more

costly negotiations.

62
One of the main areas in which ConocoPhillips UK Limited would qualify LOGIC

if they were to use it in its current form would be risk allocation, the

importance of which was disused in general terms in Chapter 2. These clauses

in particular are a problem for ConocoPhillips because corporate rules means

that ConocoPhillips UK Limited has 2 definitions of Company Group,

Company Group in the context of “Big Family” means the

company contracting for goods/services, the company’s affiliates

who are involved in the project for which the goods/services are

being provided/performed, company’s covertures’, company’s

other contractors (except for the contractor providing the

goods/services) and subcontractors, and the employees, officers,

directors and agents of all of the foregoing.

Company Group in the context of “Small Family” means the

parties referred to above EXCLUDING the company’s other

contractors and subcontractors. ConocoPhillips’s other

contractors/subcontractors are true third parties in a SF

indemnity regime.100

The choice of which definition of Company Group is to be used is determined

by where the work is to be performed and the interaction between the

contractor and other contractors who might be on a different indemnity

regime.

Another key factor in why ConocoPhillips UK Limited do not use LOGIC is

because the company is controlled centrally out of Huston. This has a major

impact on the Contracting philosophy adopted within ConocoPhillips in the UK.

100
Adapted form ConocoPhillips internal training documentation.
63
As LOGIC is only a UK wide initiative the US management do not recognise the

significance of the standard contracts. The contract templates that are used by

ConocoPhillips UK Limited are highly influenced by the US. This is to ensure

consistency across the entire company and not just on a country by country

basis.

A third factor is that the current contract templates that are used at

ConocoPhillips UK Limited service the needs of the company adequately. At

present ConocoPhillips UK Limited uses 12 different contract templates for

work conducted within the UKCS. ConocoPhillips management believe that

they have the right volume of contract and that the meet the requirements of

the company. Each of the ConocoPhillips contract documents are based on the

companies “fifteen corporate clauses”, these are set my management in the

US and all contracts must contain these clauses and the prescribed provisions

within them.

64
The fifteen corporate clauses are as follows;

1. Ethics and conflicts of interest

2. Confidentiality

3. Patent infringement

4. Ownership of Supplier Developments

5. Applicable Law

6. Laws, Rules and Regulations

7. Liens and Claims

8. Audit

9. Force Majeure

10. Risk Structure

11. Insurance

12. Taxes

13. Assignments

14. Dispute Resolution

15. U.S Export Control Compliance

Although the fifteen corporate clauses are placed upon all regions and there

subsequent business units by Head of office in USA, these clauses are region

specific and are maintained locally to ensure they are always up to date with

any changes in regional legislation.

Each of the contracts currently in use at ConocoPhillips UK Limited are

discussed in turn below.

65
5.3 Standard Contracts at ConocoPhillips UK Limited

As already stated ConocoPhillips UK Limited do not use Industry standard

contracts provided by LOGIC, instead they have a suite of contracts that they

utilise to conduct there business, these contracts are as follows –

Table 5.3: ConocoPhillips UK Limited contract Templates

TEMPLATE REFERENCE

Master Services Agreement MSA (Major)

Master Services Agreement MSA (Minor)

Aviation Services Agreement AVA

Time Charter Party TCP

Research & Development Agreement REA

Personnel Services Agreement PSA

Drilling Rig Agreement DRA

Engineering Procurement Construction Installation


EPCIC
Commissioning Agreement (or some variant of)

Transportation and Installation Agreement TIA

Materials Frame Agreement MFA

Purchase Order (materials and services) PO

Confidentiality Agreement CONA

As detailed in the table above ConocoPhillips UK Limited have 12 standard

contracts that they use. The contract template used for each agreement is

determined by the nature of the work involved. A brief description and

summary of when each contact is used is detailed below.

66
The MSA (Major) is one of the most commonly used contracts at

ConocoPhillips UK Limited. The MSA (Major) is used when the intent its to

establish general terms and conditions for the future procurement of medium

to high value or risk, ad-hoc or recurring services and/or the purchase or

rental of goods, which do not fall within the guidelines applicable to a Master

Services Agreement (Minor), a Material Frame Agreement or Purchase Order

which are described below.

When creating this type of contract, it is essential to ensure a detailed

description of the goods and services to be supplied, with call-offs through

Purchase Orders are included. The Purchase Order should only need to include

details of the schedule for performance of the work, the location for

performance/delivery of the Work, any additional rates and prices and any

additional deliverables expected.

Although the MSA (Major) details the conditions and a detailed description of

the goods and services to be provided, commitment to this work is not

concluded until a PO has been issued, by signing the contract there is no

commitment granted.

A MSA (Major) should not be placed for a period in excess of 10 years,

including all option periods.

The Master Services Agreement (Minor) is used to establish general terms and

conditions for the future procurement of ad-hoc or recurring low risk services

and/or the purchase or rental of goods, which do not fall within the guidelines

applicable to a Purchase Order. However this type of contract should not be

used for offshore well operations or marine related work, regardless of value

67
or duration. This is because this template does not contain the appropriate

level of risk allocation

and relevant insurance provisions among other things.

The MSA (Minor) must include a detailed description of the goods and services

to be supplied, with call-offs through Purchase Orders. The Purchase Order

should only need to include details of the schedule for performance of the

work, the location for performance/delivery of the Work, any additional rates

and prices and any additional deliverables expected.

The MSA (Minor) should not be placed for a period in excess of 5 years

including all option periods.

The Aviation Service Agreement is only used for the procurement of helicopter

and fixed-wing transportation services. An Aviation Services Agreement

should not be placed for a period in excess of 10 years, including all option

periods.

A time charter party agreement will be used to establish general terms and

conditions with a vessel owner for the hire of marine vessels (e.g. platform

supply vessels, multi role vessels and emergency response and recovery

vessels). The TCP is a frame agreement with call-offs through a Charter

Agreement. The Charter Agreement will contain details relating to the specific

vessel hire, start date, end date, day rate, etc. As future requirements arise,

additional Charter Agreements may be added, subject to there being a valid

TCP in place with that vessel owner.

A TCP or Charter Agreement should not be placed for a period in excess of 10

years, including all option periods.

68
There are industry standard contracts for Time charter parties, however as

with LOGIC standard contracts, ConocoPhillips UK Limited do not utilise these,

and instead have there own version, albeit that ConocoPhillips UK Limited TCP

closely reflect what is in the industry standard agreements.

There are two types of Research and development contracts that

ConocoPhillips UK Limited use. These are a single party agreement to be used

for the procurement of R&D services from a single Contractor and a multi

party agreement which is used for procurement of joint R&D projects between

ConocoPhillips UK Limited, other companies and a University/Institute.

A REA should not be placed for a period in excess of 5 years, including all

option periods.

The Personnel Services Agreement is important to ConocoPhillips UK Limited

are they have a number of Contactor personnel that work for them. A

Personnel Services Agreement is used for all temporary personnel hired in

through an agency or equivalent. This is important as this type of contract is

very different form a contract of employment that would be issued to all staff

personnel.

A PSA should not be placed for a period in excess of 10 years, including all

option periods.

69
A Drill Rig agreement is used for hire of drilling rigs and associated services. A

DRA should not be placed for a period in excess of 10 years, including all

option periods.

Engineering, Procurement, Construction, Installation and Commissioning

An EPCIC agreement is used for the procurement of some or all of the

following: Engineering, Procurement, Construction, Installation and

Commissioning services. This type of agreement must contain a detailed

scope of work, schedules for performance of work and compensation

provisions. In addition the execution plan, key personnel, progress reporting

and subcontractors must be clearly identified and form part of the contract.

Each EPCIC contract will be for a specific project and therefore the duration of

the agreement will be agreed on a case by case basis.

The Transportation and Installation Agreement is used for the transportation

and installation offshore of jackets, piles, topsides, bridge support structures,

interconnection bridges, subsea production systems or other similar items.

The TIA must contain a detailed scope of work, schedules for performance of

the work and compensation provisions, together with the execution plan and

interface responsibilities.

A TIA should not be placed for a period in excess of 5 years, including all

option periods.

70
Materials Frame Agreements are used for repetitive procurement of low risk,

low value materials e.g. personal protective equipment, gaskets, stationery,

etc. and may also include services, where the service element is related to the

supply of the materials and is a minor part of the overall contract value.

However this type of contract cannot be used for offshore well operations

materials regardless of value.

THE MFA must contain a detailed description of the goods and services to be

supplied, with call-offs through Purchase Orders. The Purchase Order should

only need to include details of the schedule for performance of the work, the

delivery/performance location, any additional rates and prices and any specific

deliverables expected.

A MFA should not be placed for a period in excess of 10 years, including all

option periods.

Purchase order are used by ConocoPhillips UK Limited for ad-hoc procurement

of low risk, low value services and materials that is not covered by an existing

MFA or MSA. Purchase order Terms and Conditions may be used for minor

offshore services (e.g. repair of snooker table, coffee machine or other like ad-

hoc services), which are demonstrably low risk, as well as low risk onshore

services. This type of agreement cannot be used for offshore well operations

or marine related work, regardless of value. They must contain a scope of

work and compensation provisions, which clearly specifies the nature and price

of the materials or services to be provided. There are no time constraints on

this type of contract due to the nature of the goods and service being provided

under them.

71
A Confidentiality agreement is used whenever ConocoPhillips UK Limited will

share ConocoPhillips UK Limited proprietary or sensitive information with an

individual or external company (e.g. seismic data, research and development

data, business sensitive information, etc.).

5.4 The future of Contracting at ConocoPhillips UK Limited

From the findings of this study it is clear that ConocoPhillips UK Limited are

currently part of a minority that do not use LOGIC standard contracts. This is

evident from the questionnaire results in chapter 6. The results show that

from the companies that responded to the questionnaire that only 9% if do not

use LOGIC standard contracts. The reasons given by these other companies

are very similar to those discussed above, namely that corporate templates

are to be used at all times.

Due to the nature of the UK Oil and Gas industry operations have continually

adapted to the challenges presented by price volatility, maturity, evolving

regulation and changing perceptions within society. With this in mind

ConocoPhillips UK Limited will continually need to review its contracts. On

discussion ConocoPhillips UK Limited acknowledge that there are advantages

to using industry standard contracts. However for ConocoPhillips UK Limited

to change there processes of contracting to use these standard contracts

would require permission from their Head Office in USA. This is not likely to

be achieved as it would mean that ConocoPhillips UK Limited would be using

different contract than the rest of the ConocoPhillips Group. In addition there

would be a large financial impact to implement the Industry standard contract,

all personnel working with the contracts would need to be trained in the use of

LOGIC contracts. Nonetheless it was suggested that in the future

72
ConocoPhillips UK Limited may look again at LOGIC as a method of

contracting, or as a minimum incorporate some of the key issues of LOGIC

where ever possible. However it is unlikely that ConocoPhillips UK Limited

would adopt LOGIC in its current form, but they may consider it if LOGIC was

updated.

73
Chapter 6 – Questionnaire results

6.1 Introduction

This chapter presents the findings of the primary research that were carried

out for this study. This chapter is split into 3 main section to reflect the

sections used within the questionnaire, these are-

1. Demographic profiling of UKCS Oil and Gas Industry Companies

involved in the study;

2. Analysis of the use of LOGIC standard contracts within UKCS oil and Gas

industry;

3. Analysis of the use of additional government standard models

The presentation of the findings will ultimately assist in the achievement of the

aim and objectives set out at the beginning of this study.

 to critically analyse the use of Standard LOGIC contracts within the UK

Oil and Gas industry;

 to evaluate whether there is a trend as to what types of companies use

LOGIC and the reasons for doing so;

 an evaluation of those companies who choose not to use LOGIC and the

reasons for this.

 to identify and discuss alternative contracting methods used by various

companies, in particular ConocoPhillips, who use a variety of bespoke

contracts,

6.2 Demographic Results

A selection of UKCS oil and gas companies were targeted as part of this

research dissertation. They were sampled from a listings found within FPAL as

discussed in chapter 4. Procurement/Supply Chain Managers were selected for

74
completion of the questionnaire because it was felt they would hold the most

knowledge of the topic in hand. The response to the questionnaire was

reasonably good with a 55% response rate. Babbie101 believes that a response

rate of 50 percent is adequate for analysis and reporting. A response rate of 60

percent is good; a response rate of 70 percent is very good.

Question 1

The length of time the operator had been involved in the UKCS Oil and Gas

industry was the introductory demographic profile question to be analysed, as

shown in figure 6.1:

Figure 6.1: Time involved within the UKCS oil and gas industry

25

20

15
No. of
Companies
10

0
0-6 years 7-12 years 13-18 years 19 years +
Duration in years

Figure 6.1 identifies that the respondents to the questionnaire ranged from

being relatively new to the industry through to being long term established

players. This data allows us to compare and contrast the contracting

101
Babbie, E,(2001) The practice of Social Research, 9th Edition, Wadsworth p 256
75
strategies and methodologies used by a variety of companies at varying

degrees of maturity and experience with the UK Oil and Gas industry.

Question 2

In addition, the second important demographic area to be analysed was the

value of the organisation’s annual turnover. The aim of this was to attempt to

draw out any connecting between the rate of annul turnover and if this

influenced the contracting strategy used. The purpose was to see if there was

any connection between, new companies which currently have a relatively low

turnover and if they used standard contracts as a method to save money. The

results are shown in figure 6.2.

Figure 6.2: Companies average annual turnover

30

25

20

No. of
15
Companies

10

0
£0-3M £4-10M £11-25m over £26m
Annual Turnover

The analysis showed that for the majority of respondents there annual

turnover was at the higher end of the scale. Although it is felt that there is a

comprehensive cross section of responses gained, this could also be regarded

as a limitation to this study as we are unable to compare the views of those


76
with a much smaller turnover, who may have different commercial restraint

placed upon them. However, the time limitations placed upon this study did

not allow for further investigation in this area.

6.3 The Use of LOGIC contracts

The next section of the questionnaire was designed to analyse the use of

LOGIC standard contracts. 91% of the respondents answered yes they do use

LOGIC at least one of the standard contracts; the majority of the 91% use

more than one of the standard contracts. This is positive insofar that a large

number of companies use LOGIC; however it was stated by LOGIC102 that over

95% of senior oil company managers said they supported the principles of

Standard Contracts. The findings in this study do not support this, although

company managers may be in support of the principle of standard contracts,

in practice the amount of companies actually using it is less.

For the purposes of the questionnaire analyses the respondents were grouped

by industry sector, the categories used were Subsea Engineering companies,

Subsea Companies, Oil and Gas Operators, Drilling companies and Service

companies.

Question 3

The aim of this question was to analysis if there was a trend between the

types of companies and the use of LOGIC contracts. The results of which are

shown in Table 6.1.

102
http://www.logic-oil.com/contracts.cfm - last accessed 7th May 2010
77
Table 6.1 Use of Logic across industry Sectors.

Subsea
Engineering Subsea Drilling Service
Company Company Operator Company Company Total
Companies that use
LOGIC 5 6 10 3 6 30
Companies that do
not use LOGIC 0 1 2 0 0 3

From table 6.1 shows the use of LOGIC contracts across the different industry

sectors. Of the companies that do not use LOGIC, 67% of these are

operators. The remaining 33% are subsea companies. When asked why the

companies chose not to use LOGIC contracts, Question 10 and what

alternative contracting structure they do use, Question 11, the responses were

very similar. The responses were as follows; all the companies’ operators and

subsea companies alike had suites of terms and conditions that they use

instead. One operator stated that their terms and conditions were very similar

to LOGIC with some extra provisions added. The Subsea company stated that

there was a reluctance within there company to use LOGIC as there was not a

uniformed use of them within the industry and until this changed they would

continue to use there own suite of contract. One of the operators identified in

this question was ConocoPhillips UK limited, who’s reasons for not using

LOGIC standard contract have been discussed already in Chapter 5.

Those companies that responded saying they do utilise the LOGIC contracts

were asked a series of questions to get a more in-depth analyses for the

reason they do this.

78
Question 4

The purpose of this question was to establish the commonalities between

sectors and the types of contracts they use. It was also to establish the

frequency at which each contract was used. The result of this are shown in

table 6.2.

Table 6.2 – Type of Contract used by industry sector

Subsea
Engineering Subsea Drilling Service
Company Company Operator Company Company
Construction Edition 2 1 1 3 0 1
Design Edition 2 0 0 4 0 1
Marine Construction
Edition 2 1 5 10 1 2
Mobile Drilling Rigs
Edition 1 0 0 9 2 0
Purchase Order Terms &
Conditions (Short Form)
Edition 2 3 1 7 1 4
Services (On- and Off-
shore) Edition 2 5 4 9 0 5
Supply of Major Items of
Plant and Equipment
Edition 2 4 1 9 1 3
Well Services Edition 2 2 1 7 1 2
SME Services Edition 1 2 1 3 0 0
Subcontract for SME
Services Edition 1 1 0 2 0 0

From table 6.2 it is clear that every LOGIC contract is used by at least on

sector. With 40% of the LOGIC contracts are used across all sectors. This

result is positive insofar as there appears to be progress towards PILOTS aim

of ‘standardisation’ which has been discussed earlier in this study.

Question 5

The aim in this question was to establish what the companies that use LOGIC

perceive to be the advantages of standard contracts and compare these to the

advantages outlined by Martin in chapter 3. Due to the nature of this type of

79
question, a number of different answers were received and overall

generalisations were made. This concurs with O’Leary who states103,

Respondents can offer any information/express any opinions they

wish…….open questions can generate rich and candid data, but it

can be data that is difficult to code and analyse.

These generalisations include that the use of LOGIC contracts saves time as it

limited the negotiations required to conclude the terms and conditions, as

both parties to the contract are generally familiar with the content and format

of the contract, this in turn save the companies money. These findings

correspond with the aims of LOGIC which are ‘to simplify the industry’s

procedures and to save costs104’. They also concur with the findings of

Martin105, who states cost savings as one of the main benefits of model

contracts. In addition one new entrant operator stated that the use of

standard contracts saves them from having to develop their own contracts –

hence saving time and money.

Questions 6, 7 and 8.

Due to the close connection of these questions, they shall be dealt with

together. From the proceeding questions it is clear that the respondents as a

majority are in favour of the LOGIC contracts, however when asked if they

qualify the LOGIC contracts, all respondents said that they did. The degree to

which people added additional clauses or amended the standard clauses varied

dramatically. Some respondents made as few as 1change, where as others

made at many as 50 qualifications, the number of qualifications made is

103
O’Leary, Z, (2004), The Essential Guide to doing research, Sage Publications, p159
104
http://www.logic-oil.co,/contracts.cfm - last accessed 8th May 2010
105
Martin, TJ and Park JJ op.cit.p8-12
80
dependant on the type of company and the type of goods/service being

undertaken. When asked the rational behind these qualifications, there were a

number of similar responses. The most common response was that

respondents qualified the standard contracts to make them compliant within

internal company requirements and procedures. This was closely followed by

the comment that the Standard contracts are generic and do not cover all

scenarios therefore respondent need to add qualifications to overcome this.

Many of the respondents commented that the reason they qualify the standard

contracts is because they do not contain adequate levels of risk mitigation,

namely the indemnities clauses, the importance of which was discussed in

chapter 3. One of the most concerning comments was made by a Drilling

company, who stated that they qualify the Mobile drill rig contract because it

is not in line with current legislation, this is because it has not been updated

since 1997. When asked if there were going to be any updates to any of the

standard contracts, LOGIC’s response was “There are no plans at present to

update the suite of contracts”106 this means that companies will continue to

qualify contracts to bridge the gaps in the legislation and risk mitigation

clauses.

Question 9

None of the respondents who use LOGIC contract use the standard templates

without adding additional qualifications. It is therefore clear that LOGIC’s aim

of standardisation has not been fully achieved. This said the use of the

standard contracts as basis of negotiation has standardised a number of

processes, however the fact that each company using the templates adds a

number of qualifications, highlight the fact that a standard contract will never

be achieved, unless updated on a regular basis.

106
Email correspondence with Ross McKenzie, Solicitor & Business Advisor LOGIC/Oil & Gas UK - dated
25th February 2010.
81
6.4 Additional Standard Governmental Models

The final section of the questionnaire was designed to analyse the use of

additional government initiatives. This section looks at the use of FPAL model

ITT’s and Industry Mutual Hold Harmless (IMHH) scheme.

Questions 12,13 and 14.

This section looks at how many respondents use the model ITT and the

reasons for using them and the reasons why they are not used.

All of the companies that do not use LOGIC also stated that they do not use

FPAL standard ITTS. From the remaining respondents only 37% of them said

that they used the FPAL model ITT’s. The reasons given for there use is similar

to that for the use of standard contract. The use of the model ITT’s saves

companies time and money, as they do not need to draft the documents, the

companies receiving these documents are familiar with the format and

content, allowing a quicker turn around of tenders and tender evaluation. The

new entrant operator identified earlier was in favour of these documents as it

saves them time, as they are not required to create there own documents.

These findings concur with the UK Upstream Supply chain Management

Network107 aims to,

 Simplify the contracting process

 Provide and easier and faster way to produce, issue and respond to

ITT/bid packages.

However the majority of respondents, 63%, do not use the FPAL ITT’s. There

a number of different reasons for this, 5 respondents stated that they do not

107
http://www.achilles.com/en/PFAL/ITT-Templates - last accessed 8th May 2010
82
tender and therefore do not need to use the industry standard ITT documents.

There were 2 respondents that said they were not familiar with the Model

ITT’s. The most common response was that the companies already had there

own company standard ITT’s or e-sourcing tools which company procedure

stated they must utilise. This said there were 2 respondents that said, despite

having internal company ITT’s they were currently reviewing the standard

documents and may consider using them in the future.

Question 15

This question looks at the number of respondents that are currently signed up

to the Industry Mutual Hold Harmless scheme. The results show that 63% of

the respondents have signed up to IMHH. For those companies that are not

signatories to IMMH, 73% of these are Operators with the remaining 27%

drilling companies. As a general rule operators do not usually sign up to IMHH

as it is designed for and signed by the contracting sector. This is backed by

Gordon108 who states,

Although operators played a substantial part in brining it into

being, the IMHH Deed is designed for, and signed by, the

Contracting sector. It is not well suited to operator-to-operator

situations and given that the operator sits at the top of the

contractual pyramid, operators should already be in a direct or at

least indirect contractual relationship with anyone who steps onto

there platform for commercial purposes, and therefore in a

position to negotiate whatever contractual risk allocation regime

to parties to those contracts choose.

108
Gordon, G & Paterson, J op.cit.P 375
83
It is clear form the results of the questionnaire that model contracts are

widely used within the UK Oil and Gas Industry. The results from the study

have identified areas within the LOGIC standard contracts where there are

failings or gaps within the standard models. This is evident by the fact that

100% of the companies who were identified as using LOGIC, said that they

qualified the contracts, often with as many as 50 qualifications. Admittedly

many of these qualifications are due to company specific requirements,

nonetheless some fundamental issues have been uncovered, such at out of

date legislation and inadequate risk mitigation.

The findings also show that other governmental models, such as the model

ITT’s are not so widely used, this is partially because of lack of knowledge of

them; this is something which needs to be addressed.

84
Chapter 7 – Conclusion and Recommendations

7.1 Introduction

The aim of this paper was to evaluate the extent to which industry standard

contracts are used within the UK oil and Gas industry, whilst comparing the

variation of there application between companies and the alternatives to these

standard models. With the ultimate aim to answer the question, Oil and Gas

industry contracts – is there such a thing?

It was then necessary to analyse the basic contracting principles, highlighting

the risks that exist within this process and identifying key contract clauses,

with the main focus on risk mitigation both in general terms and in relation to

the UKCS Oil and Gas.

In order to examine and critically assess the UK oil and Gas industry standard

contracts, it was necessary to analyse the general concept of model contracts

by examining the main advantages and disadvantages of doing so. It was also

necessary to examine the different model contracts and governmental

initiatives that exist with the UKCS oil and gas industry and how these are

received and implemented by various companies working within the UK Oil

and Gas industry.

This analysis and review enables some conclusions to be drawn and

recommendations to be made, which may provide solutions to some of the

issues raised by the analysis of the contract processes and use of model

contracts but also address the issues raised by the results if the questionnaire.

85
7.2 Conclusions

1. Analysis of case law and legislation clearly show that the law provides

protection to the contracting parties, but may also penalise a party due

to their carelessness. The important issue that has been identified is

that parties should ensure to take full advantage of the protection they

are given. This involves the parties to the contract being aware of how

the law works and its effects.

2. There are a number of key clauses that need to be considered when

drafting a contract. Focusing on risk mitigation, and in particular

indemnities, this study has established that the law allows such clauses

to stand, due to the interpretation of an indemnity clause being a way

of re-allocating liability, rather than excluding it. However the law is

very clear that such clauses should be drafted clearly, otherwise the

basic law principle of the party who breaches is liable will apply. With in

Oil and Gas contact the indemnity clauses are usually mutual indemnity

clauses, which places the risk with the party who is best placed to deal

with it, effectively making each party responsible for there own loss.

The key point is that regardless of the type of indemnity clause used, as

long as it is correctly drafted it will stand up in court.

3. On review of model contracts, and in particular LOGIC standard

contracts a number of advantages were identified via the literature

review and from the results of the questionnaire. It can be concluded

that the use of LOGIC contracts saves time as it limited the negotiations

required to conclude the terms and conditions, as both parties to the

contract are generally familiar with the content and format of the

contract, this in turn save the companies money. This may explain why

86
91% of the respondents utilise the LOGIC contracts. However the

respondent made it clear that some aspects of the LOGIC contracts

need improvement, certain key aspects are missing from the contracts

and some of the legislation contained within the contracts is out of date

which leads all of the respondents adding in qualification. The key point

here is that although the LOGIC contracts are a good basis for building

a contract, no respondents use the contracts ‘off the shelf’, they all add

qualifications, which in turn means that there is in fact no such thing as

an industry standard contract.

7.3 Recommendations

1. Introduction of revised Standard contracts

In order to address the issue of out of date legislation within some of the

model contracts, a review of the current LOGIC contracts should be

undertaken. In addition to reviewing the contracts for any changes in

legislation, it may be advisable to review the common qualifications that

companies make to the standard contracts, and where possible include

these in the revised editions. This would result in less time being spent

reviewing and negotiating the current contracts. Revision of the standard

contracts may also encourage some companies who do not currently use

the model contracts to re-consider using them.

2. Education process.

As part of the questionnaire it was identified that some companies where

not aware of the FPAL model ITT’s. It would therefore be advisable for a

formal education process to be introduced. This may consist of

presentations and or workshops to show companies the benefits of using

them. The recommended training should provide companies with practical

87
examples of how the documents should be completed and reviewed. There

should also be follow-up session if and when any changes are made to the

model ITTs.

3. ConocoPhillips UK Limited contracts aligned with LOGIC

Although ConocoPhillips UK Limited has a suite of contracts which it uses to

conduct is work and for the reasons discussed previously does not use

LOGIC. It may be beneficial for ConocoPhillips UK limited to review its

current contracts and bring them more in line with LOGIC. By doing this

time and money could be saved as negotiating contracts should become

quicker and easier as parties with whom they are contracting, may be more

familiar with the content of there contracts, if they are similar to LOGIC. It

may also be beneficial for ConocoPhillips UK Limited to investigate the use

of FPAL model ITT’s for their tendering needs, this too could save time and

money as the preparation of documentation will be reduced, and the other

parties may be familiar with the ITT documents and therefore may be in a

position to respond more quickly.

There are other recommendations that can be made, however if the above

recommendations were followed it would provide a basic framework for

improving the efficiency of model contracts within the UK Oil and Gas

industry. Once this framework was implemented further initiatives can be

introduced to provide continuous improvement.

Overall it can be concluded upon critical analysis of model contracts within

the UK Oil and Gas industry that these models are performing well, but

with the introduction of current legislation and education initiative in the

use of these models the goal of a ‘standard contract’ may be reached.

88
Appendix A

Summary of LOGIC Standard Contracts

Title Details Intended Application(s)


Construction Edition 2 This contains the General Conditions Major fabrication works;
of Contract for Construction Edition topside installations and hook-
2, Guidance Notes and a Sample up; significant topside
Form of Agreement. modifications; construction
services contracts for topsides
work and similar.
Design Edition 2 This contains the General Conditions Design contracts generally (but
of Contract for Design Edition 2, excluding well design).
Guidance Notes and a Sample Form
of Agreement.
Marine Construction This contains the General Conditions Pipelaying; offshore
Edition 2 of Contract for Marine Construction installation; subsea
Edition 2 and a Sample Form of construction; inspection repair
Agreement. and maintenance using diving
and other support vessels.
With appropriate amendments,
also suitable for other
contracting arrangements (e.g.
EPIC/EPFI).
Mobile Drilling Rigs This contains the General Conditions The provision of mobile drilling
Edition 1 of Contract for Mobile Drilling Rigs units on day work.
and a Sample Form of Agreement.

Purchase Order Terms This contains the Purchase Order Procurement transactions
& Conditions (Short Terms & Conditions (Short Form) involving high volume, low
Form) Edition 2 and Guidance Notes. value, or low technical risk.
Services (On- and Off- This contains the General Conditions A wide range of offshore and
shore) Edition 2 of Contract for On- and Off-shore onshore services.
Services Edition 2, Guidance Notes
and a Sample Form of Agreement.
This replaces separate onshore
and offshore contracts.
SME Services Edition 1 This contains the General Conditions A wide range of services
of Contract for SME Services, provided by SMEs.
Guidance Notes and a Sample Form
of Agreement and is largely based on
On- and Off-shore Services
Subcontract for SME This contains the General Conditions A wide range of services
Services Edition 1 of Sub-Contract for SME Services, provided by SMEs when acting
Guidance Notes and a Sample Form as sub-contractors.
of Agreement and is largely based on
On- and Off-shore Services
Supply of Major Items This contains the General Conditions The purchase of complex
of Plant and of Contract for Supply of Major Items capital plant and equipment
Equipment Edition 2 of Plant Equipment, Guidance Notes such as gas turbines,
and a Sample Form of Agreement. compressors and pumps.
Well Services Edition 2 This contains the General Conditions Service contracts associated
of Contract for Well Services, with well engineering work.
Guidance Notes and a Sample Form
of Agreement.

89
Appendix B

Questionnaire

Job Title: ____________________ (for analysis purposes only)

Company: ____________________ (for analysis purposes only)

Your time to complete the following questionnaire which is being conducted as


part of my LLM Oil and Gas Law research dissertation is much appreciated.
The purpose of this study is to measure the current use of Industry Standard
contracts within various companies who work within the UKCS oil and gas
industry.

Responses from this questionnaire will be kept strictly confidential, neither the
names of interviewees nor their respective organisations will be identified in
the dissertation report.

1. What length of time has your company been involved within the UKCS
Oil and Gas industry?

0-6 yrs  7-12 yrs  13-18yrs  19 yrs+ 

2. What is your company’s average annual turnover?

£0-£3m  £4m-£10m  £11m-£25  Over £26m 

3. Does your company use LOGIC standard contracts?

Yes  No  (if no, go to question 10)

90
4. Which of the following contracts does your company use?
 Construction Edition 2 
 Design Edition 2 
 Marine Construction Edition 2 
 Mobile Drilling Rigs Edition 1 
 Purchase Order Terms & Conditions (Short Form) Edition 2 
 Services (On- and Off-shore) Edition 2 
 Supply of Major Items of Plant and Equipment Edition 2 
 Well Services Edition 2 
 SME Services Edition 1 
 Subcontract for SME Services Edition 1 

5. What do you/your company see as the advantages of using LOGIC?

6. Do you qualify/amend/add special conditions to the above contracts?


Yes  No  (if no, go to question 9)

7. Why do you qualify/amend/add special conditions to the contracts and


not use them in their original form? And what are the benefits of this?

8. Does your company have a list of common


qualifications/amendments/special conditions that you always apply
when using LOGIC, and if so how approximately how many?

9. Why do you choose not to add any qualifications/amendments/special


conditions?

91
10. Why does your company not use LOGIC Standard contracts?

11. What contracting structure do you use instead? What are the
advantages of this structure?

12. Does your company use FPAL Model ITT documents?

Yes  No  (if no, go to question 14)

13. Why does your company use the model ITT’s? What are the advantages
to your company?

14. Why does your company not use the model ITT’s?

15. Is your Company a signatory to Industry Mutual Hold Harmless (IMHH)?

Yes  No 

16. Would you be willing to provide further information via interview if


required?

92
Yes  No 

If you have any additional comments you wish to make on the above topics
please make them below.

93
Appendix C

Questionnaire Results

Question 1 – Length of Time Company involved in UKCS

0-6 years 7-12 years 13-18 years 19 years + Total


Number of
Companies 2 6 3 22 33
Number of
Companies 6% 19% 9% 66% 100%

Question 2 – Company’s average annual Turn over

£0-3M £4-10M £11-25m Over £26m Total


Number of
Companies 0 0 3 30 33
Number of
Companies 0% 0% 9% 91% 100%

Question 3 – Does your company use Logic?

Subsea
Engineering Subsea Drilling Service
Company Company Operator Company Company Total
Companies
that use
LOGIC 5 6 10 3 6 30
Companies
that do not
use LOGIC 0 1 2 0 0 3

Question 4 – Which LOGIC Contracts do you use?

Subsea
Engineering Subsea Drilling Service
Company Company Operator Company Company
Construction Edition 2 1 1 3 0 1
Design Edition 2 0 0 4 0 1
Marine Construction
Edition 2 1 5 10 1 2
Mobile Drilling Rigs
Edition 1 0 0 9 2 0
Purchase Order Terms &
Conditions (Short Form)
Edition 2 3 1 7 1 4
Services (On- and Off-
shore) Edition 2 5 4 9 0 5
Supply of Major Items of
Plant and Equipment
Edition 2 4 1 9 1 3
Well Services Edition 2 2 1 7 1 2
SME Services Edition 1 2 1 3 0 0
Subcontract for SME
Services Edition 1 1 0 2 0 0

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Question 6 – Does your company qualify/amend LOGIC Contracts?

Subsea
Engineering Subsea Drilling Service
Company Company Operator Company Company Total
Companies
that qualify
LOGIC 5 6 10 3 6 30
Companies
that do not
qualify
LOGIC 0 0 0 0 0 0

Question 12 – Does your company use FPAL Model ITT’s?

Subsea
Engineering Subsea Drilling Service
Company Company Operator Company Company Total
Companies
that use
FPAL Model
ITT's 0 1 7 0 3 11
Companies
that do not
FPAL Model
ITT's 5 6 5 3 3 22

Question 15 – Is your Company a Signatory to IMHH?

Subsea
Engineering Subsea Drilling Service
Company Company Operator Company Company Total
Companies
that are
Signatories
to IMHH 5 7 4 0 6 22
Companies
that not
Signatories
to IMHH 0 0 8 3 0 11

95
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